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Strategy Two Arrows

Dollar-Cost Averaging
by WealthEffect Staff


Take advantage of the ups and downs in the stock market
  Stick with great companies  
  "Can't Beat the Feeling"  

The volatility in the market rewards investors who add to their holdings on an on-going basis. You will be buying more shares in the years when stock prices are low and less when prices are high. The average price you pay will, therefore, be lower than if stock prices had no volatility.

The importance of investing in great companies cannot be overemphasized. If you choose to speculate in mediocre companies selling at so-called "bargain" prices, you can get hurt in two ways. First, you will have no sense of predictability and, therefore, no peace of mind. Second, if the stock price drops, you won't know whether you should be buying more or not.

With a great company, the value rises over time. If the value is only going to go up in the long run, why shouldn't you want to pay as little as possible in the short run? Investing in great companies isn't a matter of winning or losing, it's a matter of how much you're going to win.


Consider Coca-Cola during the last twenty-five years. In 1973, if you had bought $10,000 worth of shares in this great company, you would have lost two-thirds of your investment in a single year! Eight years later, you would still be down by fifty percent. But, in the meantime, the earnings were tripling, the value of your investment was increasing, and you weren't being forced to sell a share while you waited.

By the end of 1998, twenty-five years after your initial purchase, your investment would be worth more than thirty times what you paid. With dividends, you'd have earned about 15% a year for twenty-five years. Your $10,000 investment would now be over $300,000 and all you did was wait.

But what if, instead of waiting, you had bought an additional $2,000 worth of stock each year for five years? Your total investment of $20,000 (the initial $10,000 plus the additional purchases) would now be worth more fifty times what you paid. Not only did you invest more money in this winner, but also, each dollar you invested did better with dollar-cost averaging. Currently, you would be sitting on a profit in excess of $1 million!

Suggestion: Go to Your Advantage