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Dollar Cost Averaging
By David Chazin
Wouldn't it be great to know in advance how an investment would perform? You could purchase an investment at its lowest price just before a surge in value. Or, you could sell it just as it reaches its peak before dropping. If you knew the right time and acted on it, investing would be easy and you could retire from Chevron tomorrow.
Unfortunately, there's no crystal ball that shows what the future holds for the financial markets or any individual stock, including Chevron's. That's why many Chevron employees take advantage of a strategy called dollar cost averaging.
Easy and Effective Investing
Dollar cost averaging is the strategy of investing a fixed amount of money at regular intervals in a stock or mutual fund regardless of market conditions or prices. This steady investing technique enables you to purchase more shares when prices are low and fewer when prices are high. Over time, the average price you pay per share generally may be lower than the average share price for the same period. The following shows how it works.
Suppose you want to invest $1,000 in a particular stock fund. Most Chevron employees would probably invest all $1,000 upfront - at $20 per share, you could get 50 shares. However, rather than investing the lump sum all at one time, you decide to invest $250 a month for four months. During the four-month period, the fund's share price fluctuates between $25 and $10 (see chart on next page), with an average price of $18.75. Since you are investing over time using dollar cost averaging, your average per-share cost is only $16.67.
Mo. $ amount Price # shares
1 $250 $20 12.5
2 $250 $25 10
3 $250 $20 12.5
4 $250 $10 25
Total $1,000 $75 60
Average Price Per Share:
($75 ÷ 4) $18.75
Your Average Cost Per Share:
($1,000 ÷ 60) $16.67
What if you decided to invest the $1,000 all at once? This strategy could pay off, but only if prices later increase. But, the risk of investing at the wrong time is also great. Using the example above, if you chose to invest the $1,000 during the first month (when the share price was $20), your average cost per share would be $20, which is significantly higher than the average cost per share over the four-month period in the example. 50 shares vs. 60 shares is a major difference, especially if you look at the effects of growth over time, and it's even worse if you repeat this same mistake year after year.
Having a regular investing schedule may help take away the temptation to invest more or less money because you think the market is undervalued or overvalued. Instead, you continue to invest the same amount of money whether the market is up or down. Choices about when to invest and at what price to invest - which can often lead to procrastination - are eliminated. With this systematic investment plan, you keep buying, and the financial markets determine how many shares you purchase.
The good news is most Chevron employees already practice dollar-cost averaging. If you are contributing to your ESIP/401(k) plan, a pre-determined dollar amount is being withheld from every paycheck and being invested in your accounts, regardless of whether the market is up-or-down. Plus, Chevron provides a match of a specific dollar amount into your ESIP.
In addition to adding discipline to your investment strategy, dollar cost averaging also helps eliminate the "worry factor." Why? Because investing a fixed amount of money at set intervals limits the impact of market volatility on your investment performance. When the market goes down, just think of it as a bargain buying opportunity. The more shares you own, the more you may benefit if the price rebounds in the future.
Think Long Term
Dollar cost averaging can be a simple and effective way to smooth out the effects of price changes and help build up your investment portfolio over time, which is especially important if you look at how investments have performed (both within your 401(k) and in general) during the past decade. Keep in mind, however, that for dollar cost averaging to work, you need to be patient and continue investing during periods of both low and high prices.
Wed be happy to arrange a meeting with you to discuss your current financial strategy and help you better make use of the dollar cost averaging strategy. Because we work with many Chevron executives, managers, employees and retirees, we're very knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces).
Please contact us at (925) 659-0217 with specific questions or to schedule a time to meet in our San Ramon, Point Richmond or Houston, TX offices. Also, follow us on LinkedIn.
David Chazin, Insight Wealth Strategies and Lincoln Financial Advisors Corp are not affiliated with Chevron.