DOLLAR-COST AVERAGING CREATES WEALTH! LET’S GET STARTED!
Disclaimer: Good Day, Readers. WealthBuildingPowers blog is a financial literacy/competency blog and does not provide specific investment recommendations.
DOLLAR-COST AVERAGING CREATES WEALTH! LET’S GET STARTED!
My favorite investment strategy is dollar-cost averaging. Regularly investing a fixed dollar amount, regardless of the share price. It develops disciplined investing habits, is efficient, and lowers the stress of believing you can be smart enough to time the market.
A PERFECT EXAMPLE – THE 401K PLAN
Let’s say Theo takes $1,000.00 monthly pay period and invests it in the S&P 500 ETF. When the market is up, his $1,000.00 buys fewer shares, and when the market is down, his money buys more shares.
THEO’S 401K ACCOUNT JUNE 2021 to JUNE 2022
| Timing | Amount | Share price | Share purchased |
| Month 1 June 2021 | $1,000.00 | $386 | 2.59 |
| July 2021 | $1,000.00 | $399 | 2.51 |
| August 2021 | $1,000.00 | $403 | 2.48 |
| September 2021 | $1,000.00 | $416 | 2.40 |
| October 2021 | $1,000.00 | $399 | 2.51 |
| November 2021 | $1,000.00 | $423 | 2.36 |
| December 2021 | $1,000.00 | $421 | 2.38 |
| January 2022 | $1,000.00 | $439 | 2.28 |
| February 2022 | $1,000.00 | $417 | 2.40 |
| March 2022 | $1,000.00 | $395 | 2.53 |
| April 2022 | $1,000.00 | $416 | 2.40 |
| May 2022 | $1,000.00 | $381 | 2.62 |
| June 2022 | $1,000.00 | $377 | 2.65 |
| 32.11 Total SHARES | |||
| Total invested: | Average cost/share: | Total shares purchased & Average Shares Purchased/Month | |
| $13,000.00 | $406 | 32.11 Total Shares and Average of 2.47/Month |
Over a 13-month time frame, Theo purchases an average of 2.47 shares. Theo acquired more shares in June 2022 when the market was down. In January 2022, when the market was high, Theo purchased fewer shares.
BENEFITS OF DOLLAR-COST AVERAGING
- POTENTIAL COST/SHARE REDUCTION
- DISCIPLINE INVESTING: When you pay yourself first, you tend NOT to miss the money and will stick to your investment plan.
- AVOIDS MARKET TIMING. Trying to pinpoint when the market will reach its peak or hit bottom and buying and selling accordingly—is impossible, even for investors like Warren Buffett. “We haven’t the faintest idea what the stock market is gonna do when it opens on Monday — we never have,” “I don’t think we’ve ever made a decision where either one of us has either said or been thinking: ‘We should buy or sell based on what the market is going to do,” Buffett added, referring to his longtime business partner Charlie Munger. “Or, for that matter, what the economy is going to do.”
- ELIMINATES EMOTIONS: Take the emotional component out of your decision-making. You buy a set dollar amount of your preferred investment irrespective of what the market does. When the market goes down as it currently is, you see this as an opportunity to buy your shares at a sales price!
CONCLUSION
Unless you married for money {I hope you read the prenup} START SAVING using dollar-cost averaging! The average” American worker has a 401(k) balance of $142,000. This is the “mean” reached by adding up all the balances and dividing by the number of participants. It is heavily skewed by a small number of very large accounts. (Elon Musk walks into a bar, and the “average” net worth of everyone in it skyrockets.) The “median” is more practical, calculated by ranking everyone from poorest to richest and picking the one in the middle. Today the median American 401(k) balance is … $35,000. Forty percent of working Americans have less than $20,000 in their 401K accounts.
It is almost always impossible to determine a market bottom, which is why dollar-cost averaging can help smooth market timings.
“People who are good with numbers tend to have higher income and life satisfaction.” STUDY YOUR MATH!
Buffett said that he, longtime business partner Charlie Munger and other Berkshire Hathaway executives have long used this strategy because it has a higher chance of a return, and it alleviates some of the pressure of trying to predict the stock market. If the value of a stock dips after you buy it, Buffett noted, that means its shares have become less expensive — so buy more of them.
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ABOUT ME
I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger with an NC. State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.
I left a corporate career because I desired to make a difference as a speaker and writer. I was blessed to be coached and mentored by strong women and men in my family and professional life. It is my time to serve and give back.
DISCLAIMER
I started my first business at ~13 years of age (a small but brilliantly created plant nursery). I am a successful investor in stocks, options, and real estate and am happy to share my finance and investment lessons. I am NOT a licensed financial advisor. Please do not construe my suggestions on this blog as recommendations for your situation. As an investor, you must establish your risk/loss tolerance. Investment in any asset involves risk, including complete loss.
Please seek your licensed CPA or fiduciary financial advisors for individual financial advice.
I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.
