{"id":334,"date":"2004-06-30T02:05:27","date_gmt":"2004-06-30T09:05:27","guid":{"rendered":"http:\/\/www.studioglyphic.com\/blog\/?p=334"},"modified":"2008-11-20T01:06:06","modified_gmt":"2008-11-20T09:06:06","slug":"an-example-of-dollar-cost-averaging","status":"publish","type":"post","link":"https:\/\/www.studioglyphic.com\/blog\/2004\/06\/30\/an-example-of-dollar-cost-averaging\/","title":{"rendered":"An Example of Dollar-Cost Averaging"},"content":{"rendered":"

So I was goofing around with my own investment records when I realized that I had a great way of showing the advantage of dollar-cost averaging. As you may recall from the mutual fund primer<\/a>, dollar-cost averaging lets you reduce the variance (to use a poker term) by spreading out your investment over time.<\/p>\n

Here’s an example using some real world numbers (Vanguard 500 Index Fund). The following are share prices at the end of every quarter for two years.<\/p>\n

\r\nDate        Price\/Share\r\n6\/21\/2002        $91.22 \r\n9\/27\/2002        $76.37 \r\n12\/27\/2002       $80.73 \r\n3\/28\/2003        $79.69 \r\n6\/20\/2003        $91.94 \r\n9\/26\/2003        $92.08 \r\n12\/26\/2003      $101.15 \r\n3\/26\/2004       $102.30 \r\n<\/pre>\n
From June 2002 – March 2003, the price\/share of the fund dropped 12.64%. So if you had taken your maximum $2000 IRA contribution and stuffed into this fund in June and looked at your balance in March, you would have been pissed off.<\/p>\n
From June 2003 to March 2004, the fund’s price\/share increased 11.27%. If you had put in $2000 in June and looked at your balance in March, you would have been pretty psyched.<\/p>\n
Overall, from June 2002 to March 2004, this fund saw its share value go up by +12.15%. Your $4000 investment over two years would be valued at $4468 for a gain of 11.71%.<\/p>\n
But what if you had practiced dollar cost averaging? That is, dividing your $2000 in fourths and investing it over the year?<\/p>\n
\r\nDate        Price\/Share        Trans. Amt       Shares\r\n6\/21\/2002        $91.22          $500.00        5.4813\r\n9\/27\/2002        $76.37          $500.00        6.5471\r\n12\/27\/2002       $80.73          $500.00        6.1935\r\n3\/28\/2003        $79.69          $500.00        6.2743\r\n6\/20\/2003        $91.94          $500.00        5.4383\r\n9\/26\/2003        $92.08          $500.00        5.4301\r\n12\/26\/2003      $101.15          $500.00        4.9432\r\n3\/26\/2004       $102.30          $500.00        4.8876<\/pre>\n
From June 2002 to March 2003, you would have seen a drop in the value of your investments of only -2.40% because 1\/4 of your shares were purchased at the high price of $91.22, but the other 3\/4 were purchased at lower prices (lower prices also translate into more shares).<\/p>\n
From June 2003 to March 2004, you would have seen a gain in the value of your investments of only 5.88% because at least half of your shares were purchased at higher prices.<\/p>\n
Overall, however, you would have seen a gain of 15.59% on your $4000 investment for a final value of $4,623.47 (remember, the lower prices enabled you to buy more shares during 2002-2003, which translated into more wealth when the fund price topped $100 in 2004).<\/p>\n
This demonstrates that dollar-cost averaging not only works to reduce your risk, but in this particular example, allows you to outperform the index itself!<\/p>\n","protected":false},"excerpt":{"rendered":"
So I was goofing around with my own investment records when I realized that I had a great way of showing the advantage of dollar-cost averaging. As you may recall from the mutual fund primer, dollar-cost averaging lets you reduce the variance (to use a poker term) by spreading out your investment over time. Here’s […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[8],"tags":[],"class_list":["post-334","post","type-post","status-publish","format-standard","hentry","category-useful-stuff"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/psIKy-5o","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/www.studioglyphic.com\/blog\/wp-json\/wp\/v2\/posts\/334","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.studioglyphic.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.studioglyphic.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.studioglyphic.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.studioglyphic.com\/blog\/wp-json\/wp\/v2\/comments?post=334"}],"version-history":[{"count":0,"href":"https:\/\/www.studioglyphic.com\/blog\/wp-json\/wp\/v2\/posts\/334\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.studioglyphic.com\/blog\/wp-json\/wp\/v2\/media?parent=334"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.studioglyphic.com\/blog\/wp-json\/wp\/v2\/categories?post=334"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.studioglyphic.com\/blog\/wp-json\/wp\/v2\/tags?post=334"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}