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Dollar Cost Averaging in Turbulent Times

If you are looking for a time-tested strategy that offers simplicity, with a long-term approach, this strategy may be right for you.

Choosing an investment strategy that suits you is never easy. You face a myriad of tough questions, including:

  • How much money should I invest?
  • How often should I invest?
  • Where should I invest my money?

Fortunately, there's a strategy that could be the answer to many of your concerns. It's called Dollar Cost Averaging, and it may simplify your investment planning.

What is Dollar Cost Averaging?
The name may sound complicated but, simply put, Dollar Cost Averaging is nothing more than the systematic investment of a fixed dollar amount at regular time intervals. For example, you could invest $100 every week. Or $500 every month. Or $1,000 every three months. The amount and frequency of your investments depends upon your financial means and long-term goals. However, once you initiate the plan, the key to success is sticking with it and ignoring market fluctuations.

How Does Dollar Cost Averaging Work?
Basically, Dollar Cost Averaging attempts to take the ups and downs of the market and "smooth them out." Instead of trying to time the highs and lows (a daunting task, even for professionals), you're investing the same amount of money at regular intervals. Dollar Cost Averaging encourages a systematic approach to investing that frees you from trying to time the market. Let's take a look at how a Dollar Cost Averaging program would work under three hypothetical market environments: fluctuating, rising, and declining.

Dollar Cost Averaging in Turbulent Times
Let's assume you decide to put $100 every month in an investment that is currently selling for $10 per share. (For this hypothetical example, let's assume that there are no additional charges). The first month you invest $100 and receive 10 shares. Then, in an extreme but easy to follow example, the market falls and the price drops to $5 per share. In the second month your $100 buys you 20 shares. The market rebounds in the following month, the price jumps to $10 per share, and for your $100 investment you receive 10 shares. Let's see where you would stand:

Fluctuating Market
  Regular
Investment
Share
Price
# of Shares
Acquired
  $100 $10 10
  $100 $5 20
  $100 $10 10
Total: $300   40

Average Share Cost To You: $7.50 ($300 ÷ 40)

This time-tested strategy could result in a greater number of shares acquired at a lower average cost per share.

In Good Times...
Let's say you start your investment program, and the market rallies. Your investment rises to $20, then $25, and eventually $50 per share. Let's see where you stand.

Rising Market
  Regular
Investment
Share
Price
# of Shares
Acquired
  $100 $20 5
  $100 $25 4
  $100 $50 2
Total: $300   11

Average Share Cost To You: $27.27 ($300 ÷ 11)

... And In Bad Times
It's tough to find a silver lining in the dark cloud of a declining market, but through the consistency of Dollar Cost Averaging, you can take some consolation. Let's assume you start your investment program and the market begins to slide and the price drops to $25, then $20 and eventually $10 per share.

Declining Market
  Regular
Investment
Share
Price
# of Shares
Acquired
  $100 $25 4
  $100 $20 5
  $100 $10 10
Total: $300   19

Average Share Cost To You: $15.79 ($300 ÷ 19)

The hypothetical examples set forth above are for illustrative purposes only.  They do not reflect the actual or expected performance of any investment product. The last two examples show that because you invested a fixed dollar amount at regular intervals, ignoring the price fluctuations, you were able to purchase a larger number of shares when the price was low and a smaller number of shares when the price was high. In effect, you are buying more at lower prices, and relatively less at what might be considered higher prices.

No Guarantees in Life
As illustrated in the "bad times" example, Dollar Cost Averaging does not guarantee a profit nor protect against losses. It's every investors dream to "beat the market," but unfortunately there are no magic strategys that can guarantee that. However, a Dollar Cost Averaging program can offer a disciplined, systematic approach to investing, that could be the cornerstone of your long-term planning. Since such programs involve continuous investment in securities regardless of fluctuating price levels, you should consider your financial ability to continue making purchases during periods of low price levels in order to maximize the benefits of a dollar cost averaging program.  

Setting Up a Dollar Cost Averaging Plan
While Dollar Cost Averaging may simplify the questions "How much?" and "How often?" you should invest, before you can enjoy the benefits of this program you must first answer the question, "Where should I invest?" Vehicles such as mutual funds and variable annuities offer investment flexibility and convenience. You can set up a customized program where you invest a fixed amount at regular time intervals into an investment product. Your regular investments can be made by simply writing checks, or you can take advantage of the convenience of bank drafting. With this strategy, automatic payments are withdrawn from your bank savings or checking account to purchase shares on a regular basis.

Contact Us Today
A NYLIFE Securities registered representative can help you choose the appropriate financial products to help meet your long-term needs.  Securities offered through NYLIFE Securities LLC (Member FINRA/SIPC), A Licensed Insurance Agency. 51 Madison Ave., NY, NY 10010.

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