# Dollar Cost Averaging Article byAbhiroop Das ## Dollar-Cost Averaging Definition

Dollar-cost averaging means investing the same amount of money in an asset (stocks) at periodic intervals irrespective of its price thereby reducing the risk of price volatility in the market.  For example, an investor would invest \$100 every month on the first day of the month for five years in a particular mutual fund.

### Example

You can download this Dollar Cost Averaging Excel Template here – Dollar Cost Averaging Excel Template

Here is the dollar cost averaging example; let us look into what would happen if we had invested \$1000 regularly on the 28th of every month for a given six month period, as shown below.

Here we can see the average share price of Apple over the entire period is \$181.26. The price rises quite sharply after 26th February 2019 and decreases again after 26th April 2019, indicating moderate volatility. This makes it very difficult for the investor to determine at which date he should invest in Apple. In this case, he makes a periodic investment of \$1000 on the 28th of every month as shown below –

Source: Yahoo Finance

Here we can find the number of shares bought by dividing the amount invested of \$1000 by the day’s close price. We can easily find the average share price he paid for these investments by using the formula:

• Average Price Paid = Total sum invested / Total shares bought
• = 6000/34
• = \$176.47

There is an alternate approximate formula to calculate the average dollar price which uses the :

• Dollar Average Price = Number of periods/ ∑(1/Share Price on investment dates)
•  = 6 / {(1/156.23)+ (1/156.30)+ (1/173.15)+ (1/188.72) + (1/204.61)+ (1/178.23)}
• = \$174.57

The slight difference in the two average values is because we have rounded off the number of shares in the denominator of the first formula to zero decimal  (since share is generally bought in integral numbers) as in \$1000 divided by \$156.23 (on 28th December 2018) gives 6.4 which we have rounded off to 6 shares. But in the second , we have not rounded off the share price, and hence there is a slight difference between the two figures.

In this case, we see that the investor buys at an average cost of \$176.47 per share in dollar-cost averaging, which is 3% less than the average price of Apple for the same period. We can also note that the investor bought the least number of shares (five) on the days where the share prices were unusually high.

### Benefits

• The first benefit of dollar-cost averaging is that it is very convenient to set up this plan and removes the need of for investors who do not track the market on a regular basis or who do not have much knowledge about the market.
• The second benefit is this method averages out the fluctuations of share prices and helps investors reduce their on securities that decline in value.
• And the last benefit is that it is affordable for investors who do not have the capacity to invest a huge sum of money at a particular time. For example, in our case, for a salaried person, it is easier to invest \$1000 per month for six months than investing \$6000 on a single day.