Dollar Cost Averaging Calculator: A Great Investment Strategy
Table of Contents: Dollar Cost Averaging Calculator
When starting your investment journey, you may find yourself trying to sort through tons of information readily available online. Technical and fundamental analysis, tactical asset allocation, momentum investing, and contrarian investing are only some of the terms you will find.
If you are a new investor trying to figure out all of these, you might feel overwhelmed.
There seems to be a common misconception that investment has to be difficult to be effective. Fortunately for all of us, this is not true as most of the time, the basics will be more than enough for more people to achieve their goals.
Of all the basic strategies out there, Dollar Cost Averaging is one of the most popular for a reason: it works.
“Invest for the long haul. Don’t get too greedy and don’t get too scared.”
This quote by American investor Shelby M.C. Davis is sound advice for any investor looking to make it in the market. It also encapsulated perfectly what dollar cost averaging is all about: consistency.
If you want to understand why dollar cost averaging is one of the most popular investment strategies and why you should be using it, keep reading. We will tell you everything you need to know to start making use of it and seeing a profit.
What Is Dollar Cost Averaging?
Dollar cost averaging is an investment strategy in which the investor invests a specified amount of money with a certain regularity. The strategy is intended to reduce the risks associated with investing while also allowing for the diversification of their assets in the long term.
American economist and investor Benjamin Graham was one of the biggest advocates of this strategy, describing it as follows in his “The Intelligent Investor” book:
“The third is the device of ‘dollar-cost averaging’, which means simply that the practitioner invests in common stocks the same number of dollars each month or each quarter. In this way, he buys more shares when the market is low than when it is high, and he is likely to end up with a satisfactory overall price for all his holdings”
As you can see, the main requisite to using Dollar Cost Averaging is having the resources to be constant in your investment. For example, if you commit to investing $100 each month, you should aim to do so every month to ensure the strategy works correctly.
Doing so will minimize the effects of volatility, crashes, and other incidents that could have resulted in tangible losses in other circumstances.
The logic behind dollar cost averaging is that in the long term, investors will end up buying more shares at a low price while also buying fewer shares at a higher price. Of course, this also depends on the stock or investment asset you are acquiring, which is why you should make sure to invest in solid companies or projects.
Calculating Your Dollar Cost Averaging
Now that you have an idea of what dollar cost averaging is, you might be wondering how to calculate it. Well, the answer to this is quite simple: You always invest the same amount. If you committed to investing $100 the first month, you would have to invest $100 the next month, and $100 the one after that… and so on.
There might be months when you will find yourself thinking that the market is quite high and it is not worth it to invest. In such cases, you should just carry on and invest the $100.
The same is true when the market is crashing, which might be difficult for some investors as fear is a common feeling under those circumstances. In such cases, just be courageous and stick to the plan.
As Graham said:
“Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions.”
As you will be investing the same amount of money every time, dollar cost averaging doesn’t require you to do complex calculations but just to decide which stock you will be investing in. However, if you want to know the average cost of all of the shares you have acquired at any given time for a particular company, you can use this formula:
Average Share Cost = Total Capital Invested / Total Number of Shares
Imagine you committed to investing $100 dollars each month in XYZ stock. Let’s say you bought 10 shares at $10 the first month, 9 shares at $11 in the second, 12 shares at $8.3 in the third, and another 12 at $8.3 in the fourth month. In such case, the formula would be applied as follows:
Average Share Cost = $400 / 43
Average Share Cost = $9.3
As you can see, you would have earned an average of $0.7 per share if you were to quit your position at that point. You could then calculate your total profits using the formula:
Total Profit = Profit Per Share * Total Number of Shares
Or in the case of our example:
Total Profit = 0.7 * 43
Total Profit = $30.1
As you can see, the calculations required by the simple dollar cost averaging calculator spreadsheet strategy is pretty simple and logical, even in the long term. This makes this strategy a perfect tool for any investor looking for consistency in the long term without having to scratch their head every time they make a move.
What Are the Benefits of Dollar Cost Averaging Calculator?
In addition to being extremely easy and straightforward to use, dollar cost averaging comes with a lot of other benefits for new and veteran traders. These include:
- Habit-forming: Dollar cost averaging is one of the best ways for investors to learn financial discipline and reinforce good investment habits.
- Reduces risk: By using dollar cost averaging in the long term, the strategy reduces investment risk and other negative consequences of volatility related to bad timing.
- Removed emotion from investing: By committing to investing a certain amount of money regularly, no matter the state of the market, dollar cost averaging helps investors get rid of psychological bias…Especially fear.
- Can be automated: Most investment platforms will now offer investors the option to perform dollar cost averaging automatically. This allows investors to follow the strategy in a sort of auto-pilot, which can be great for those lacking time.
As you can see, dollar cost averaging can bring more than just simplicity to the table. It is a strategy that allows you to focus on what matters while taking away most of the factors that become a problem for new investors.
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