Dollar Cost Averaging
Investing in the stock market involves a lot of unpredictable factors. So many first time investors get scared off by not knowing what stock(s) to buy at what time. Timing the market is a daunting task, but thankfully there are strategies that take timing out of the investing equation.
Dollar Cost Averaging is an investment method that mitigates the risk of timing the market by dividing up initial investment over time. The concept is simple. Rather than trying to buy low and sell high, the investor picks a fixed incremental dollar amount to allocate over time.
Dollar Cost Averaging Example
For example, Investor A wants to invest $5000 in stock XYZ. He decides to buy 100 shares at the current price of $50 per share. His friend, investor B decides to buy $5,000 of stock in the same stock, but $1,000 at a time on the first day of the next five months (dollar cost averaging).
Stock XYZ Prices:
Month 1: $50
Month 2: $45
Month 3: $40
Month 4: $48
Month 5: $52
Month 6: $60
By month six, Investor A has $6000 with a $1000, or 20%, net return. Investor B however, has a total equity of $6,437 for a net return of nearly 29%. Investor B took advantage of the changes in price in order to net greater returns by splitting up his initial investment over time! By fixing a dollar amount invested per month, Investor B was able to buy more shares at lower prices and fewer shares at higher prices.
Not satisfied? Let’s take a look at a real stock: Tesla.
Dollar Cost Averaging in Real Life
Tesla June 15, 2018 – October 29, 2018
Investor A decides to invest a lump sum of $50,000 into Tesla on June 15th, 2018 at a price per share of $354. Investor B also decides to invest $50,000, but in increments of $10,000 on the 15th of each month.
June 15: $354
July 15: $312
August 15: $342
September 15: $289
October 15: $260
Current Price: $333
At the current price, Investor A has actually lost money. His initial investment of $50,000 is now worth only $47,034. However, Investor B, who bought $10,000 worth of Tesla stock on the 15th of each month now has $54,146 for a net positive return of 8.3%.
While no investment method is foolproof, dollar cost averaging lowers risk for investors with long term investing goals. It’s not going to get you rich quick, but it is a smart way to make the most of changes in stock prices over time. Try dollar cost averaging with your Wall Street Survivor virtual portfolio today!
BEST STOCK NEWSLETTER OF 2020 (November 7, 2020 UPDATE)
TWO (2) of this year's Motley Fool Stock Picks Have Already QUADRUPLED, ONE has TRIPLED, and 2 more have DOUBLED in just 10 Months!
We have been tracking ALL of the Motley Fool stock picks since January 2016. That's almost 5 years and over 115 stock picks. As of Friday, November 7, 2020, TWO of their 2020 stock recommendations have already quadrupled (ZM and TSLA), another one has tripled and 2 more have doubled (SHOP and NVTA all in just the first 10 months of 2020.
In addition, 10 of their 2019, 9 of their 2018, 10 of their 2017 and 14 of their 2016 picks have also doubled. Best of all, over the last 5 years the average stock pick is up 177%. That beats the SP500 by an average of 129%. And that's even accounting for all of this COVID mess that has wreaked havoc on most stocks. BUT, the Fool has done so well because they have quickly identified stocks this year that will perform well in the post-COVID world. THAT is how the Fool consistently does so well--they adapt and constantly pick stocks before everyone else realizes the opportunities.
- Zoom Video (ZM) – April 16, 2020 pick and it is already up 230%
- Shopify (SHOP) – April 2, 2020 pick and it is already up 177%
- Zoom Video (ZM) – March 19, 2020 pick re-recommended and it is already up 301%
- DexCom (DXCM) picked Feb 20, 2020 right before the market crashed and it is still up 33%
- NVTA picked February 6, 2020 is up 102%
- Tesla (TSLA) picked January 2, 2020 before the crash and it is up 373%
- HubSpot (HUBS) picked December 5, 2019 and it is up 92%
- Netflix (NFLX) picked November 21, 2019 and it is up 55%
- Trade Desk (TTD) picked November 11, 2019 and up 146%
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FYI -- ALERT as of November 29, 2020 -- Did you see the news? TESLA hit a new high this week and is now at $585. TESLA was the Motley Fool's January 2, 2020 pick back when it was at $86 so that stock is now up 580% in less than a year. Also TTD is now up 353% since they recommended it in November 2019 so it is up 353% in exactly 12 months. Also, 19 out of 22 of this year's picks are up with an average return of 77% compared to the market's 17% return. In addition to TSLA's 580% return this year, 4 other picks have more than doubled (their February pick NVTA is up 125%, March pick ZM is up 281%, April picks of SHOP and ZM again are up 198% and 213%; May pick NOW is up 38%; their Sept 3 pick FVRR is already up 76% and October 1, 2020 pick of PINS is already up 56%.
Over the last 5 years their average stock pick hass almost tripled (up 198%)! This time period covers the 2016 election, the Trump administration, COVID, and now the Motley Fool is getting ready to release their stock picks that they expect to do well during the Biden administration. Don't miss out on the Motley Fool's next stock pick. Here is the schedule for their next TRADE ALERTS:
- December 3, 2020 - Tom's New Stock Recommendation
- December 10, 2020 - Tom's 5 New Best Stocks to Buy Now List
- December 10, 2020 - David's New 5 Best Stocks to Buys Now List
- December 17, 2020 - David's New Stock Recommendation