Dollar Cost Averaging

1
Dollar Cost Averaging

• Portfolio Management

1
K. Hartviksen
2
Dollar-Cost Averaging

• This is a simple investment strategy that many
  purport will improve the rate of return an
  investor will realize on a portfolio over the
  long term.
• It is a strategy that is often used to placate
  the smaller investor and give them some
  confidence that investing the same small amount
  on a regular basis can be useful strategythe
  reality is that this may not be the best of all
  strategies.

2
K. Hartviksen
3
Investment Selection

• As in any investment strategy, due diligence in
  the process of selecting an investment with good
  prospects is important.
• This is true whether the investment is a single
  common stock or the units in a particular mutual
  fund.

3
K. Hartviksen
4
How is dollar cost averaging accomplished ?

• Invest the same amount each month in the
  investment of your choice.
• Over the long-term, the cost-base of your
  investment fund will change. This may enhance
  your prospects for a favourable return on that
  investment, however, dollar cost averaging will
  only do this if the market value of your
  investment first falls and then later risesso
  dollar cost averaging is a bearish bet on your
  investment.

4
K. Hartviksen
5
Example - Side-ways Market

• Assume you invest 1,000 a month for 6 months in
  a market where the price of the stock is going up
  and down in the short term but essentially
  remaining unchanged (ie. going sideways)

5
K. Hartviksen
6
Example 1 ...
6
K. Hartviksen
7
Example 2 - A volatile market

• By chance, as you invest, if you are buying at a
  time of market weakness, the cost base of your
  shares can decline.
• Even if the ending share price in the period ends
  up being the same as where you started, you can
  earn a return because the average cost base of
  your shares has been reduced.

7
K. Hartviksen
8
Example 2 ...
8
K. Hartviksen
9
Example 3 - In a rising market

• Obviously, in a rising market you will experience
  returns.
• The returns would have been greatest if you put
  the 6,000 in at the beginningbut for many
  investors, the initial investment cash is not
  available.

9
K. Hartviksen
10
Example 3 ...
10
K. Hartviksen
11
Example 4 - In a falling market

• Obviously, in a falling market you will
  experience losses.
• Notice that the cost base of your shares is
  declining over time as you add more shares to the
  portfolio at progressively lower prices.
• A small increase in share price will now earn you
  a positive return.

11
K. Hartviksen
12
Example 4 ...
12
K. Hartviksen
13
Example 5 - In a falling market

• A small increase in share price will now earn you
  a positive return.

13
K. Hartviksen
14
Example 5 ...
14
K. Hartviksen
15
Example 6 - Buying on Market Weakness

• Strategically buying shares when market prices
  soften can yield very positive results
• The lower the market price, the more you buy!
  The higher return when the market price returns
  to where it started.
• YOU MUST BE CONVINCED OF THE INVESTMENT MERITS OF
  THE STOCK OR MUTUAL BEFORE YOU BEGIN!!

15
K. Hartviksen
16
Example 6
16
K. Hartviksen
17
Conclusions

• Dollar cost averaging can yield significant
  returns to the investor who must invest over a
  long period of time, however, this type of
  performance requires that the price of the
  investment decline over a portion of the period
  of time that you invest. The longer and more
  severe the period of price decline, the greater
  the potential returns upon price recovery. This
  is a bearish bet on the market.
• Research shows that superior strategies exist.
• In an environment of rising prices, it is always
  better to invest fully rather than dollar cost
  average.
• Saving on a regular basis may be a good strategy
  for the small investor, but investing in this
  manner is not the best investment strategy.

17
K. Hartviksen