Beating Broke

Personal Finance from the Broke Perspective

Dollar-Cost Averaging

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Let me start by saying that investing is risky business.  You should consult a professional for professional advice before doing any investing.  I’m a hobbyist, not a professional.

What exactly is dollar-cost averaging?

Dollar-cost averaging is a method of long-term investing.  By buying stocks in smaller chunks over time, the amount you pay for the stocks will balance itself out to an average.  So, in an example, if you were to buy 1 share of Microsoft for $50, then another share for $40, your dollar-cost average price per share would be $45.  So if the shares go back up to $50, you would be making money by selling.  Obviously, this is normally on a much larger scale.  Think 10s, 100s and 1000s of shares.

Another example.  If I buy 50 shares of Microsoft stock at $50 and then the stock market tanks.  Suddenly, my 50 shares of MSFT are only worth $25 each.  That hurts.  The stock is still strong, but the market is poor.  I decide to buy more.  This time, I can buy 100 shares for the same amount as before.  Now, I own 150 shares of Microsoft and my total cost is 50@$50 and 100@$25.  My cost per share is dollar-cost averaged down to $33.33 each.  The stock only has to gain $8 for me to break even, and anything beyond that is gains. (note that I’m not including anything as far as fees.  Those will vary)

In troubled economic times, many people often overlook the benefits of dollar-cost averaging and participate in the mass hysteria.  If, instead, investors would take advantage of the opportunity, they could find themselves the recipients of a handsome profit when the market returns to it’s normal levels.  That, of course, is if it returns to it’s normal levels.  Which it most likely will.

Dow Drops 504 – Now What?

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The Dow dropped by nearly 504 points (503.99) yesterday.  Now what?  Don’t panic.  As the bells start ringing to open the markets again today, they will likely slip even further.  Don’t panic.  There’s a silver lining to this.

I’m an optimist.  The glass is always half-full.  The silver lining here is actually a benefit of Dollar-Cost Averaging.  If you don’t know what that is, you’ll pick up a little bit in this post, but it’s a good time to subscribe to this site as we’ll be discussing DCA a little bit further later this month.

As everyone knows, if you want to make money in the stock market, you have to buy low and sell high.  A lot of money can be made if only you can do that.  Most of us don’t have the crystal ball to do it perfectly though.  Let me help you out.  Buy now.

When you see a headline like the one above, it’s a pretty safe bet that it won’t get much lower.  And if it does?  Dollar-Cost Average to the rescue.  And in the long run, the market will come back up, and you won’t even need another dot-com bubble to make yourself a safe full of money.

So what if the Dow drops more than it has in 7 years?  Buying at a low like this can only help your Dollar-Cost Averaged prices.  And if it gets lower?  Buy more.  Pretty simple really.

The people in charge here at Beating Broke are not financial professionals.  Please don’t take our advice for gospel.  If you are going to follow the advice here, please consult a financial professional first.  And, just for the record, nothing is a sure thing in investments.  So if you lose all your money, don’t come crying to us.  And don’t sue us either.