by Dallas Brown

Created on: June 01, 2009   Last Updated: June 03, 2009

Dollar-cost averaging is a technique of investing which relies on regular investments into a common stock, or into a certain mutual fund or other desired investment. Suppose you use a mutual fund and their manager to do most of your investing. In one fund, perhaps an international fund, you decide to place $1000 to start and then regularly invest $250 per month. Then, in a U.S. fund, you do the same thing: start with $1000, and then invest $250 per month. If your age is in excess of fifty years, (50), you may be able to invest this amount into an IRA each year under catch-up provisions, with the maximum allowed being $6000 per year. Just place the initial $1000 in by Dec 31, (or at the latest, by Apr 15, your tax filing deadline if the IRA is a traditional IRA). For Roth IRAs, the $1000 initial deposit should be in by Dec. 31. So, whether deductible or not, you are allowed to place the $6000 total into the fund each year.

When you receive a statement from the Mutual Fund management company, it may look something like this:

Date Funds invested Price / share Shares purchased Total shares

12/31/08 $1000.00 10.86 92.081 92.081

01/18/09 250.00 10.43 23.969 116.050

02/18/09 250.00 10.21 24.486 140.536

03/18/09 250.00 9.58 26.096 166.632

04/18/09 250.00 10.01 24.975 191.607

05/18/09 250.00 10.50 23.810 215.417

06/18/09 250.00 10.90 22.936 238.353

Notice that your average price during this time was: $10.40. Notice some other things here also. The initial deposit bought you 92.08 shares, but then the following $1500 bought you 151.052 more shares. Due to the direction of the price movement, this is the most favorable example of dollar-cost averaging that may be drawn up. Notice that as the price goes down, the regular deposit of $250.00 buys more and more shares, and when the price returns back on an upward trend, less shares are bought than in the previous months. As you may also note, a total of $2500.00 has been invested. At the end of the six months, with a new high price of $10.90, the $2500 / 238.353 shares = $10.49 / share. This is the dollar-cost average of each share you have bought. So the average gain per share is $0.41 / share. With 238.353 shares (x10.90) = $2598.05 being the new value of

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