DRIP - Value Your Business & Time

Dollar Cost Averaging

Dollar cost averaging is the practice of buying fixed dollar amount on regular basis over long periods of time, regardless of the market value of a share. The investor buys more shares at select time intervals or for a fixed amount rather when the market price goes up or down. This is also known as the constant dollar plan.

Dollar Cost Averaging is an investment method highly beneficial to DRIP investors. As the stock fluctuates, the more significance in dollar cost averaging advantages can be seen. Research also sheds light that investing a lump-sum is better when using dollar cost averaging when money is invested for a longer period of time. The investors have to keep track of the cost basis of these small purchases for tax purposes.

There are some factors that should be taken into consideration when evaluating whether DRIPs are the right investment:

  • DRIPs help the investors to grow their portfolio overtime and benefit hand in hand with dollar cost averaging.

  • DRIPs are popular because they offer investors a cost-effective and handy mechanism to implement dollar cost averaging.
Example on dollar cost averaging:

An illustration stated by Simon Hardie, chartered accountant and owner of the Shape of Money website.

You invest a standard amount each month of $100

Buy shares at the price of $1/share

Buy shares at price of $0.80 per share

Buy shares at price of $0.65 per share

Buy shares $1.25 per share.

You own 459 units. The units costs $1.25 and your total investment is worth $574.The cost of 459 units over four months was $400 at average price of $0.87 per share.

Some thoughts evaluating whether DRIPs are the right investment option:

DRIPs are the sensible way for the investors to take advantage of Dollar Cost Averaging on top of it, Dollar Cost Averaging advantage does not include extra potential yield earned from dividends.