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Dollar Cost Averaging

Share current LOB: PersonalBanking

If you haven't started investing towards a long-term goal because you're worried about short-term market volatility, consider using a popular investment strategy called dollar cost averaging. Dollar cost averaging takes some of the guesswork out of investing in the stock market. Instead of waiting to invest a single lump sum until you feel prices are at their lowest point, you invest smaller amounts of money at regular intervals--the same amount each time--no matter how the market is performing. Your goal is to reduce the overall cost of investing by purchasing more shares when the price is low and fewer shares when the price is high. Although dollar cost averaging can't guarantee a profit or protect against a loss in a declining market, over time your average cost per share is likely to be less than the average market share price.

How does dollar cost averaging work?

To illustrate how dollar cost averaging works, let's say that you want to save $3,000 each year for your child's college education. To reduce the risk of buying when the market is high, you decide to invest $250 in a mutual fund each month. As the following chart shows, this approach can help you take advantage of fluctuating markets because your $250 automatically buys fewer shares when prices are higher and more shares when prices are lower.

Dollar Cost Averaging

Month Investment Amount Market Price Per Share Number of Shares Purchased
January $250 $10 $25.00
February $250 $10 $25.00
March $250 $11 $22.72
April $250 $12 $20.83
May $250 $11 $22.72
June $250 $13 $19.23
July $250 $14 $17.86
August $250 $13 $19.23
September $250 $14 $17.86
October $250 $12 $20.83
November $250 $10 $25.00
December $250 $11 $22.72

This chart is a hypothetical example and does not reflect the return of any specific investment

If you calculate the average market price per share over the 12-month period ($141 divided by 12), the result is $11.75. However, if you calculate your average cost per share over the same period ($3,000 divided by 259 shares), you'll see that on average, you've paid only $11.58 per share.

Putting dollar cost averaging to work for you

You may not realize it, but if you're investing a regular amount in a 401(k) or another employer-sponsored retirement plan via payroll deduction, you're already using dollar cost averaging. In fact, you can use dollar cost averaging to invest for any long-term goal. It's easy to get started, too. Many mutual funds, 529 plans and other investment accounts allow you to begin investing with a minimal amount as long as you have future contributions deducted regularly from your paycheck or bank account.

If you're interested in dollar cost averaging, here are a few tips to help you put this strategy to work for you:

  • Get started as soon as possible. Once you've decided that dollar cost averaging is right for you, start investing right away. The longer you have to ride out the ups and downs of the market, the more opportunity you have to build a sizeable investment account over time.
  • Stick with it. Dollar cost averaging is a long-term investment strategy. Make sure that you have the financial resources and the discipline to invest continuously through all types of markets, regardless of price fluctuations.
  • Take advantage of automatic deductions. Having your investment contributions deducted from your paycheck or bank account is an easy and convenient way to invest, and can help you get in the habit of investing regularly.

SunTrust Bank and its affiliates and the directors, officers, employees and agents of SunTrust Bank and its affiliates (collectively, “SunTrust”) are not permitted to give legal or tax advice.  While SunTrust can assist clients in the areas of estate and financial planning, only an attorney can draft legal documents, provide legal services and give legal advice.  Clients of SunTrust should consult with their legal and tax advisors prior to entering into any financial transaction or estate plan.  Because it cannot provide legal services or give legal advice, SunTrust’s services or advice relating to “estate planning” or “wealth transfer planning” are limited to (i) financial planning, multi-generational wealth planning, investment strategy, (ii) management of trust assets, investment management and trust administration, and (iii) working with the client’s legal and tax advisors in the implementation of an estate plan.

These materials are educational in nature.  The implications and risks of a transaction may be different from individual to individual based upon past estate, gift and income tax strategies employed and each individual’s unique financial and familial circumstances and risk tolerances.  

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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