The Truth About Dollar-Cost Averaging by Thomas Bulkowski
Should You or Shouldn’t You?
Does dollar-cost averaging work? And what is zero-cost averaging? Find out more about these two concepts here.
Several months ago, I was watching The View on television and a guest was on that day who is well-known for her financial expertise. She said something along the lines of, “Use dollar-cost averaging to invest in the stock market.” I rolled my eyes.
WHAT IS DOLLAR-COST AVERAGING?
Dollar-cost averaging is a way to buy stocks over time. Say you receive a holiday bonus of $12,000. Should you buy $12,000 worth of stocks at one time (a lump-sum investment) or should you spend $1,000 each month (dollar-cost average) in the stock market until the bonus is completely invested?
By buying stocks over time, you buy fewer shares when the market is up, but more shares when the market is down. If the market recovers, those shares bought at a lower price will help boost the total value. That’s the theory. Since the market has risen over time, dollar-cost averaging would make money. But the question remains: Which is best, investing a lump sum at one time, or dollar-cost averaging into the stock market?
To help answer that question, I programmed my computer to invest $12,000 using dollar-cost averaging by spending $1,000 on the first trading day of each month (starting with the closing price on February 1, 1950) and selling all shares a year later at the closing price on the last trading day of the month (January 31, 1951) in the S&P 500 index.