Listen to any advice on retirement planning, and you hear: Dollar Cost Averaging, it’s good for you. Most personal finance software support it in one form or another. It goes like this: if you accumulate equities (stocks) for your retirement account, and spend a fixed amount each month, you will be ahead of someone who buys a fixed number of shares each time. Let’s throw some numbers on it, to quantify the benefit.
Let’s take a relatively stable stock – Microsoft (MSFT). It hasn’t moved much in 10 years, and some think it may be a safe place to park your money, if your expectations are low.
Let’s say our friend Terrence bought 10 shares of MSFT at the opening of the trading day every week from December 3, 2010 to November 9, 2011 – that’s 50 weeks in all. By now, Terrence will have bought 500 shares for $13,063.04, averaging $26.13 per share. His smart buddy Phillip follows the dollar-cost averaging advice, investing $260 weekly. As a result, he owns 498.72 shares of MSFT for the total cost of $13,000. Average price per share is 13,000 / 498.72 = $26.07. Phillip wins, but not by much: quarter of a percent.
This example shows that while dollar-cost averaging does better than fixed share purchases, the benefit is miniscule when applied to stable stocks. For stable stocks, the pricing structure of your broker may be more important than the perceived advantage of a “bulletproof” investment technique.
[...] Post navigation ← Previous [...]