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Dollar-Cost Averaging


We generally advise new investors relating to how often (and how much) money to invest in their retirement and educational savings accounts. At Lightship Mutual, we are staunch supporters of the "buy and hold" model of long-term investing, one of our favorite strategies is dollar-cost averaging. With this strategy, our clients are instructed to invest a small amount of money regularly, regardless of market conditions.

Quick and Easy Investing
With dollar cost averaging, you invest the same dollar amount at regular intervals (i.e. monthly, quarterly, semi-annually) over a long period time. By consistently following this strategy, you may be able to reduce the impact of market fluctuations on your investment portfolio.*

For example, let's say that you decide to invest $300 each month towards your child's college education. As the following illustration shows, you automatically buy more shares when prices are low and fewer shares when prices are high:

Average market price per share:

$30 + $10 +$20 + $15 + $25= $20
5 purchases

Investor's average cost per share:

$1,500 total investment= $17.24
87 shares purchased
Five Hypothetical Investments

Your regular monthly investment of $300 bought more shares when the price was low and fewer shares when the price was high. The result? The average cost of the shares you purchased is less than the average market price per share over the period.


It's [Not Always] About the Benjamins
Even though our example above uses a $300 monthly investment, dollar-cost averaging works with as little as $25 per month. The key is not necessarily how much you can afford to put away each month, but how consistently you do it. You are building positive financial habits, and dollar-cost averaging is the investing equivalent of brushing & flossing.

This hypothetical example is for illustrative purposes only and does not represent the performance of any particular investment. Actual results will vary.

*Dollar cost averaging does not guarantee a profit or protect against a loss in a declining market. Investors should consider their ability to continue investing regularly through all types of markets.

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Written by Justin S. Parr @ 9:05 AM

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