Dollar cost averaging is a method of accumulating assets by purchasing a fixed dollar amount of securities, at regularly scheduled intervals, over a period of time (for example, $100 per month over the next five years). When the price of the securities is high, your fixed dollar amount will buy fewer securities, but when the price of the securities is low, your fixed dollar amount will buy more. For example, when your share price is $25 your $100 will purchase four shares, but if the price drops to $20 it would buy five shares.
This allows you to take advantage of fluctuations in the market. As a result, dollar cost averaging with a fixed dollar amount should yield a lower average per share price than if you bought a fixed number of securities for each periodic interval.
Note: 401(k) contributions are a good example of dollar cost averaging, because they are deducted from each of your paychecks and then sent to the investment company.
Dollar cost averaging is often favored by those who wish to make their periodic investment a part of their monthly budget. The amount invested each month is predictable. An automatic investment plan ensures that the predetermined amount is properly invested at appropriate intervals. Among other things, this relieves you of the concern and emotional burden that comes with trying to decide when, and how much, you should be investing when the price of your securities is rising or falling. Experts suggest that this strategy works best with a single investment vehicle that regularly fluctuates in price.
Remember that since dollar cost averaging involves continuous investment in securities regardless of those securities’ fluctuating prices, you should consider your ability to continue purchases through periods of low price levels. Also, all investing involves risk, including the possible loss of principal, and there can be no guarantee that any investing strategy will be successful.
Michael J. Brown, AIF® Senior VP / Branch Manager, Janney Montgomery Scott, 401 New Road, Suite 200, Linwood, NJ 08221, 609-601-2512, michaelbrown@janney.com.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021 Janney Montgomery Scott LLC Financial Advisors are available to discuss all considerations and risks involved with various products and strategies presented. We will be happy to provide a prospectus, when available, and other information upon request. Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Janney Montgomery Scott LLC is a member of the New York Stock Exchange, Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
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