Understanding Dollar Cost Averaging

Here I have three charts,

and if we were looking at these charts, naturally, probably if you

ask somebody, what, what's the best investment?

Which one you-- would you pick?

Well, most people would probably pick this top

one.

That's what everybody really likes.

That's what really adds comfort and helps us sleep.

Because notice what's happening here.

We're-- In this example, on all, all of these charts, we're investing

two hundred and forty dollars a month

into, um, a fund of some type. In this first

chart, notice when we first start, they're twenty dollars a share,

for example. And therefore, if we're investing two hundred and forty

dollars, we get to buy twelve shares. And then it goes up to thirty.

Notice when they cost thirty dollars a piece, we only get to buy eight.

So maybe it stays there for a little longer.

We get to buy eight again, and then it goes up to forty.

Well, at forty dollars a piece,

and we're investing two hundred and forty dollars, we only get to buy six.

So maybe it stays there a little bit, and then it goes up to forty-eight.

We only get to buy five now, and it stays there for a little bit,

and then it

goes up to sixty bucks, and then it stays there for a little

while.

Now, this is the investment everybody would

really like to have because notice what

happens. We buy, and it goes up in value.

Stays there, we buy some more, it goes up in value.

We buy some more, it goes up in value.

So

every time we buy, our, our investment is going up,

and we feel really good. We think that's great.

Well, notice if we add up all the shares

that we would own after this period of

time, there would be sixty-two shares, and they'd be worth sixty dollars a

piece.

And that would be a total of thirty-seven hundred and twenty dollars in our

investment.

Now, let's take a look at this next example.

This chart doesn't really look quite as good.

Notice here, I'm gonna start all of these at twenty

dollars a share.

Here at twenty dollars a share, we get to buy twelve.

Okay, then it goes up to thirty, so we feel pretty good at right now.

And we only get to buy eight, and then it goes up to forty,

so we only get to buy

six now. And now the emotions start coming in

because now the market starts crashing.

So here we go back down to only twenty dollars, right back to where we

started. And then it gets even worse.

It goes down to ten dollars a share, so now it's worth half of where

we started this investment, and we're not feeling very good about

ourselves.

And then it stays there at the bottom there for a while.

It takes a little while before it starts to recover.

And then it finally gets back up to twenty dollars a share, and then it,

it finishes at thirty dollars a share. Okay?

Now, notice it finished at half of the value of

this first one.

But notice because

it was at a low point for a while, and that gave us an opportunity really to

buy

the market when it was on sale, you got to buy more shares during

that period

of time. So if we add up these, these shares here, there's two-- there's a

hundred and forty-two shares, and they're only worth thirty dollars a

piece, but notice it's actually a better

investment

than this one that just goes up every time we buy. Okay?

So sometimes it's really difficult to tell over a long period of time

which is the best investment just by looking at a chart.

If we would have been an investor that was just investing every single month,

okay, so this is the concept of dollar cost

averaging.

When the market is down, we don't want to panic.