Dollar cost averaging (DCA) is a technique designed to reduce market risk through systematic purchase of securities at predetermined intervals and set amounts. If you participate in your companys 401K plan, knowingly or unknowingly, you are practicing dollar cost averaging. Each pay period your company deducts a specified dollar amount from your paycheck; the plan administrator then purchases stocks or bonds, on your behalf, in your chosen funds. This process happens every pay period, regardless of the markets trading level, until you change the instructions. DCA is one of the few strategies that most investors agree on its effectiveness in building long-term wealth. If it is such a well known and used strategy, why do so few people use it outside of 401K investing? In the previous paragraph, I suggested that people unknowingly were dollar cost averaging. I am willing to bet that your plans advisor did not explain the purchasing strategy as dollar cost averaging and that the benefits in investing non-401K funds were not espoused. Here is a news item for you. If Wall Street cant make money off a strategy, it will not be promoted. Wall Street makes money by your paying of large commissions to its full-service brokers and by your hyper-trading in online accounts. Wall Street depends on traders emotions to dictate trading strategies. Every trader has to manage fear and greed each day. Fear of a stock going lower, compels a trader to sell low. While the fear of a stock going higher (a.k.a. greed), will induce a trader to buy high. Buy high and sell low, the exact opposite of a successful long trade. Dollar cost averaging eliminates the fear and greed emotions through systematic purchases regardless of the markets state. To make it more difficult for investors to practice this strategy, very few brokerage firms offer the ability to automatically dollar cost average into individual stocks. However, most will allow DCAing into mutual funds - so, why not individual stocks? I believe that I have already answered that question. I have found two brokers that allow dollar cost averaging into individual stocks: FolioFn and ShareBuilder. I have an account with FolioFn and am quite pleased with their services. Although I do not have an account with ShareBuilder, I have read excellent reviews about their offerings. Both allow dollar-based investing which means buying stocks in a dollar amount that you chose instead of multiples of a stock price. In other words, you can invest $50 or $200 per month or any dollar amount in a stock just like in your 401K plan. Combining dollar cost averaging and my cycles thesis as discussed in Dollar Cost Averaging Your Way to Double Digit Returns, is a systematic process to outperform Wall Street. |
