Dollar Cost Averaging
Habit of taking monthly contributions and buying into shares of index stocks, mutual funds, ETF's, or stocks regardless of prices falling or rising.
Logic Behind Dollar Cost Averaging
Since most indexes will appreciate in value annually, due to poor stocks being removed and stronger stocks replacing them, indexes like the Standard & Poor's 500 averages 10% annually (14% in the past 15 years).
When the index price falls we are able to purchase more shares, when price rises our shares are worth more
Since we are investing for our retirement, we are not concerned about the day to day or month to month price fluctuations.
Shares
Not all shares will have the same outcome, but selecting strong companies may have exponential returns
Some shares offer quarterly dividends for holding shares
Example of Dollar Cost Averaging Shares
If we purchased one (1) share of BAC every month from November 2008 until November 2016 we would have 97 shares
The share price of BAC on November 2008 was $15.16 and the price in November 2016 was $15.08
While it looks like nothing happened during that time, here are the actual returns
97 shares
Average Cost Per Share = $13.34
13% Return on Investment (ROI)
Dividends collected $52.61 or 4% (This was during the housing crisis and BAC dividend decreased significantly)
Total ROI 17%
Dividends during this time averaged 0.01 to 0.05; prior to the housing crisis dividends were 0.40 to 0.65; average of 0.40 dividend would have returned over $600 in dividends over the same time period or 46% ROI.
Example of Dollar Cost Averaging an Index
Using the same concept as the above, we purchase on one index every month (SPLG - S&P 500) in the same time period
We would have 97 shares and a 37% ROI
This is why you should invest more into indexes, unless you have a stock that could be the next Google, Apple, Amazon
Mutual Fund
Mutual Fund, Invidividual Stocks
S&P 500
Nasdaq 100
S&P500, Individual Stocks
Nasdaq 100, Individual Stocks
ETF(s), Individual Stocks
Individual Stocks
100% of your monies will go to purchase your Mutual Fund, S&P500 Index, or Nasdaq 100
Example: You invest $500/month
If your Mutual Fund is $50, you would purchase 10 shares
If the S&P 500 Index is $100, you would purchase 5 shares
If the Nasdaq 100 is $125, you would purhcase 4 shares
Each month you would continue to purchase regardless of whether the market is going up or down.
Leftover Money (Money not Invested)
Mutual Funds allow you to purchase fractions of shares
For the other two options, we would allocate the money to the next month to purchase additional shares
Best Case Scenario: Price falls, your money can purchase more shares, your value increases when price rises.
Allocate a percentage to each
Mutual Fund 80%, Individual Stocks 20%
S&P500 75%, Individual Stocks 25%
Nasdaq 50%, Individual Stocks 50%
How you allocate your percentage depends on you and your investment beliefs
If you want stability, allocate more towards Funds, Index, ETFs
If you want a larger exposure to a specific stock, then you would allocate more for that stock
You would allocate your money based on your conviction to a stock
Example
25% Apple
50% NVidia
15% Google
10% Microsoft
You can change your percentages as stocks prices rise, change what stocks you purchase based on events, invest into other areas to create a more balanced portfolio, or just concentrate your money into several really good companies to keep it simple.
Some people believe it is better to invest into 4-5 stocks that you really believe in, while others want more diversity.
While diversity can help in slow periods for some sectors, it can also have you investing into stocks that may not provide the best growth or returns on your investment annually.
Personally, if you want diversity, get an ETF, Index, or Mutual Fund.
The next step is the same regardless of the option you selected above. Once you make your purchase, wait for next month and calculate how many shares you purchase based on new money and balances carried forward.
50% - SPLG, Current Price $60/share
50% - TQQQ, Current Price $75/share
$500 x 50% = $250
SPLG = $250 / $60 shares = 4 shares, $10 remaining to be allocated/carried forward for the next month
TQQQ = $250 / $75 shares = 3 shares, $25 allocated to next month
Overall: 4 SPLG shares, 3 TQQQ shares
50% - SCHG, Current Price $27/share
50% - NVDA, Current Price $150/share
$500 x 50% = $250
SCHG = $250 / $27 shares = 9 shares, $7 remaining to be allocated/carried forward for the next month
TQQQ = $250 / $150 shares = 1 share, $100 allocated to next month
Overall: 9 SCHG shares, 1 NVDA shares
Month 1
25% - SCHG, Current Price $50/share
25% - SOXL, Current Price $36/share
50% - NVDA, Current Price $140/share
$500 x 25% = $125
$500 x 50% = $250
SPLG = $125 / $50 shares = 2 shares, $25 remaining to be allocated/carried forward for the next month
SOXL = $125 / $36 shares = 3 shares, $17 allocated to next month
NVDA = $250 / $140 shares = 1 share, $110 allocated to next month
Overall: 2 SCHG shares, 3 SOXL shares, 1 NVDA share
Month 2
25% - SCHG, Current Price $52/share
25% - SOXL, Current Price $32/share
50% - NVDA, Current Price $160/share
$500 x 25% = $125
$500 x 50% = $250
SPLG
$125 + $25 (previous month) = $150
150 / $52 shares = 2 shares, $48 to be carried forward
SOXL
$125 + $17 = $142
$142 / $32 shares = 4 shares, $14 carried forward
NVDA
$250 + $110 = $360
$360 / $140 shares = 2 share, $80 carried forward
Overall: 2 SPLG shares, 4 SOXL shares, 2 NVDA shares