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Dollar Cost Averaging
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kodiak
Senior |
21-Sep-2007 19:37
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hi kilroy, very informative post on dollar averaging stock investing . appreciate it very much |
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KiLrOy
Master |
21-Sep-2007 18:50
Yells: "I buy only what I can see." |
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After the 3 points mentioned, I missed out the important paragraph below. An Example of a Dollar Cost Averaging PlanYou have $15,000 you want to invest in Sprint FON common stock. The date is January 1, 2000. You have two options: you can invest the money as a lump sum now, walk away and forget about it, or you can set up a dollar cost averaging plan and ease your way into the stock. You opt for the latter and decide to invest $1,250 each quarter for three years. (See chart for math of dollar cost averaging plan.) Had you invested your $15,000 in January 2000, you would have purchased 264.46 shares at $56.72 each. When the stock closed for the year in December of 2002 at $13.69, your holdings would only be worth $3,620! Had you dollar cost averaged into the stock over the past three years, however, you would own 746.21 shares; at the closing price, this gives your holdings a market value of $10,216. Although still a loss, Sprint FON stock must only go up to $20.10 for you to break even, not $56.72, which would have been required without the dollar cost averaging. To go a step further, without dollar cost averaging you would break even at $56.72. With dollar cost averaging, you would have turned a profit of $27,326 when the stock hit that price thanks to your lower cost basis ($56.72 sell price - $20.10 average cost basis = $36.62 profit x 746.21 shares = $27,326 total profit.) |
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KiLrOy
Master |
21-Sep-2007 18:47
Yells: "I buy only what I can see." |
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This technique is mostly use by value investors for their portfolio. Although I must say I prefer to buy when the market is taking a beating rather then on a periodic basis so when presented with this article, I wasnt too enthusiatic about the periodic buying however it does make sense if you are starting out with your portfolio. The end bit about mutual fund, I dislike the mgmt fee so it's not in my portfolio for sure. :) Enjoy the read, I got a boat to catch. Technique that Drastically Reduces Market RiskDollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts. Many successful investors already practice without realizing it. Many others could save themselves a lot of time, effort and money by beginning a plan. In this article, you will learn the three steps to beginning a dollar cost averaging plan, look at concrete examples of how it can lower an investor?s cost basis, and discover how it reduces risk.
Dollar Cost Averaging: What is It?Instead of investing assets in a lump sum, the investor works his way into a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over several years, providing insulation against changes in market price.
Setting Up Your Own Dollar Cost Averaging PlanIn order to begin a dollar cost averaging plan, you must do three things:
Combining the Power of Dollar Cost Averaging with the Diversification of a Mutual Fund
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