Financial Literacy Month: What is the average purchase price?

By Portia Wood for Wood Legal Group LLP

A popular investment technique, dollar cost averaging, increases long-term returns.

Instead of investing in a particular asset at a fixed price, the goal of cost averaging is to divide the amount of money you plan to invest and buy smaller amounts over a longer period of time, by paying the current price at any time. weather.

This will reduce the chances of you paying more for an investment that will soon drop in price. If you split your money and make multiple purchases, you then maximize your chances of paying less, on average, over time.

The bonus is that your money starts working for you consistently, ultimately leading to long-term growth while reducing the impacts of unwanted volatility.

If you have a 401(k), you’re probably already implementing the cost-average investing strategy, potentially without even realizing it. You may have chosen a predetermined percentage of your salary to invest in your 401(k), which is likely invested in mutual funds or index funds.

How does the average purchase price work?

Over time, asset prices often increase, although the increases are not constant. This means that they are difficult, if not impossible, to predict. Many prices follow no predictable pattern, and dollar cost averaging works with that fact rather than against it.

Trying to predict the market and determine the best times to buy, including buying assets when prices are low, is nearly impossible even for professional stock pickers. Nobody knows how the market will change, so trying to predict it is a losing battle. Today’s low could be tomorrow’s high, or vice versa, but there’s no way to know for sure.

You need time to see what would be the most favorable prices for any asset. Of course, by then it is already too late to buy. By trying to time your purchase, you may end up buying at a price that has already plateaued after making its big gains.

Research by Charles Schwab found that investors who tried to time the market saw fewer gains than investors who consistently invested using the dollar cost averaging strategy. But what is the secret?

It all comes down to the fact that cost averaging removes the emotional aspect of the investment process. You just invest the same small amount of money on a regular basis, and over time it adds up. Plus, you’ll end up buying a lot less stock when prices are high and a lot more when prices are low, which is ideal.

Ultimately, you’ll save money on every stock you buy by spreading your investments over a year instead of how much it would cost to invest all your money at once. With cost averaging, you will buy more shares at a lower price per share, on average. In turn, when the mutual fund, for example, increases in value over time, you own more shares in that valuable investment.

If you don’t have a lot of money to invest all at once, cost averaging can help you invest your money in stocks and shares more consistently. Instead of waiting until you’ve saved hundreds or thousands of dollars, cost averaging allows you to participate in market growth sooner. In return, you’ll avoid investing a large sum of money at a time that isn’t beneficial or ideal from an investment perspective.

Since market declines cannot be predicted, the cost averaging strategy reduces your investment risk while increasing your chances of seeing impressive returns. If you’re new to investing and have less money to spend on stocks, cost averaging might be right for you.

It is also ideal for people who do not know how to time the market. Also, if it is psychologically unlikely that you will continue to invest in bear markets, this may be the best way for you to benefit from growth in the future.

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