How it Helps Me Make Money
If you have a nice little chunk of money that you want to invest in a stock you like, most savvy investors will tell you not to throw it all into that stock at once. They will tell you to invest in increments. Maybe 25% of it. Then another 25% a month later. Then 25% after that and so on. Thats’s called dollar cost averaging.
What is Dollar Cost Average?
Most people think of dollar cost average as putting their money into a stock in increments to reduce the impact of volatility, regardless if the price of the stock is going up or down. My version is a little different. If a stock is at $50 per share and I have $10,000 I want to invest in it. If I make an initial investment of $2,500 and it goes up and never goes below $50 I’m done putting more money into that stock, unless it’s still a screaming deal. Would have I liked to have more than $2500 in that stock that went up? Of course! But that’s just the way it goes sometimes. There will be more opportunities. That’s how I look at it.
How Dollar Cost Averaging Worked for Me
A few years back I was interested in buying Verizon. I really liked their dividend yield and I thought at $50 per share at the time along with a low P/E ratio they were a good deal. I bought about 20 shares. Then they dropped down to $48 so I bought 10 more. Then they dropped to $46 so I bought some more. I wasn’t worried at all about them going down. I liked them as a company. They dropped to $44 so I bought my last 10 shares. After 6-8 months of a slow drop the stock finally began to rise. Now Verizon hovers around $60 per share. So that was a nice profit and my dollar cost average method worked to perfection!
When I do my research and get excited about a stock, I like to ease my way into it. That way I’m getting the best deal possible for it. Sometimes I start with a small position and it spikes up and I don’t get as many shares as I hope. But stocks are like buses, if you miss one, another one is sure to come by soon after.