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Millions of investors are familiar with the concept of "dollar-cost averaging" – meaning that they buy a fixed dollar amount of something regularly over time regardless of share price.
Today I want to share a Total Wealth Tactic that can help you build bigger profits faster.
In case you are not familiar with the term "dollar-cost averaging," it's simply a means of accumulating investment assets by buying the same dollar amount of shares at some predetermined regular interval, regardless of the market price at that time.
Using this tactic ensures that you're always buying low when an opportunity arises.
I like it because buying more shares at lower prices and buying fewer shares at higher prices is a big win over time.
Doing so harnesses the natural ebb and flow of prices, which means that you'll wind up with higher profits down the line as a company matures and more investors pile in as the price goes up.
How It Works
This is an especially good tactic to use on stocks you might otherwise think are "too expensive" for your retirement – think Apple Inc. (Nasdaq: AAPL), Alphabet Inc. (Nasdaq: GOOGL), and Amazon.com Inc. (Nasdaq: AMZN).
Imagine you automatically send $300 each month toward a stock, let's call it XYZ, for your retirement fund. It's April and shares of the stock are trading at $50 per share. Your automatic purchase of $300 worth translates into six shares:
$300 ÷ $50.00 = 6 shares
In May, perhaps there is geopolitical tension that drives the stock down to $30. But, in sticking to your disciplined approach, you still devote $300 as planned. This time, your automatic $300 purchase translates into 10 shares:
$300 ÷ $30.00 = 10 shares
The following month, it trades at $46.15. You automatically devote another $300 and purchase 6.5 shares:
$300 ÷ $46.15 = 6.5 shares
By July, let's say that there's a rally and the stock hits $54.50 per share. You automatically pick up another 5.5 shares:
$300 ÷ $54.50 = 5.5 shares
After your July purchase, you're sitting on 28 shares for an average buying price of $42.85 per share. In total, you spent $1,200 ($300×4).
Now, consider if you had instead spent all that $1,200 in one go back in April.
$1,200 total investment ÷ $50.00 per share = 24 shares
What I like about dollar-cost averaging is that it helps keep risks low yet returns high, because it prevents you from investing a single large amount at the wrong time… like now, for example, if you're one of millions of investors worried prices could drop further.
I'm also a big fan of the discipline dollar-cost averaging instills because it takes emotion out of the equation.
And finally, dollar-cost averaging forces you to buy more shares when prices are low, while fewer shares are purchased when prices are high. Over time, your basis – a fancy way of saying your total cost – actually drops and that, in turn, means you have that much more upside.
Here's an Example…
Imagine investing $10,000 into Apple in September 2008.
You'd be sitting on 421 shares worth only $5,313 as of March, 3, 2009, when people thought the end of the financial universe was upon us.
Had you dollar-cost averaged in for three months starting that same September, though, your holdings would be sitting on 581 shares worth $7,333 on the same day. Both are losses and that's no fun.
Here's where it gets interesting – and very profitable.
Apple would have to rise only $4 per share for you to break even if you'd dollar-cost averaged in, versus needing gains of $11 per share for you to break even if you went all in.
More to the point, 12 months later you'd be sitting on profits of 37.98% because of dollar-cost averaging, versus barely breaking even had you invested all at once.
I think that's a powerful and very compelling performance advantage that capitalizes on your skepticism yet keeps you in the game…
…even if stocks still have a ways to go before they find another bottom.
Now for the good stuff.
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean. In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.