Since graduating from college several years ago, I have been dollar cost averaging when I buy shares of a mutual fund for my Roth IRA. I also dollar cost average in my company’s 401k, which is a conglomeration of different index funds, as well. As most of you hopefully know, dollar cost averaging is an investment strategy designed to reduce volatility in your portfolio. Stocks and mutual funds are purchased in fixed dollar amounts at regular intervals (like every month), regardless of what direction the market is moving. So, as prices of stocks and mutual funds rise, you purchase fewer shares and as prices fall, more shares are subsequently bought.
The Standard & Poor’s 500-stock index has gained an average of 5% annually over the past 20 years (even despite the recent bear market). Since 1989, the S&P500 has actually tripled in value. But, few people plunk down all their investment money at once. Most of us invest a set amount at a time through 401k plans. That is the safe way to mitigate your risk of investing a lump sum at the peak of the market.
To give you a quick example, if you invest $500 a month in a good growth stock mutual fund at $50 a share, you purchase 10 shares each month or time period. If the price falls to $40 a share, your $500 will now buy 12.5 shares each time. Over time with price increases and decreases, your cost basis will even out and so will your risk since you bought some of your stock or shares of your mutual fund when they were both high and low.
So, you might be asking where I’m going with all of this dollar cost averaging talk. I have ridden some stock market highs over the years, and of course I have continued to invest throughout our recent bear market. Now that the stock market is slowly creeping back to its former glory, the losses in my portfolio are starting to go away. And, now I am faced with trying to figure out my break even point. In economics, investing, and business, the break-even point is the point (cost per share in this example) at which cost and revenue (or profits) are equal. At the break even point, there is no net loss or gain, and the investor has “broken even”. A profit or a loss has not been made.
I personally use Google Finance’s portfolio feature to track how many shares of stock and mutual funds. It is a great tool because it tell you your cost basis which is the amount of money that you have personally invested as well as showing you how many shares you have, their market value, your gain (or loss), the percentage gain, and your overall return.
You can also use finance software like Quicken. Quicken is part of Intuit, the same company that offers other great software solutions like TurboTax and QuickBooks software. Quicken and Intuit have a huge amount of award-winning products and services that can help you manage your personal and small business finances.
- Why Dollar Cost Averaging Makes Sense and Works For Investors
- There Is No Such Thing As The Lost Decade With Dollar Cost Averaging
- Maxing Out Roth IRA While Prices Are Low Instead of Dollar Cost Averaging