Have you ever heard the term “dollar average investing” and wondered what it means? If so, read on. If not, read on anyway.
Dollar average investing refers to averaging the purchase price of stock (or other investments) with other purchases of the same security. For example, if you buy 1 share of WalMart at $50 and 1 share of WalMart at $60, your average cost is $55. That means $55 is your break even point, and every change above or below $55 is a profit or loss. This is deceiving though.
I purchase stock in my company every month at the end of the month as part of a stock purchase plan. I have bought shares for a wide range of prices. My “dollar cost average” is $3.30 per share. However, I bought shares above $5 and below $2.50. If the price today is $3.00, I have made money on share purchased for less than $3 and I have lost on purchases above $3.
That is why dollar cost averaging is deceiving. Just because you broke even on the entire investment does not mean you did not lose on the initial (or later) investment. I like to look at my investment purchases separately, not lumped together, for this very reason. Some months I made a good investment decision (to date), some months I made a bad decision (to date). I expect the stock to go up toward $10 in the long run, but stock valuation is for another post.
Just be wary of an investment advisor that tries to convince you to invest more in a stock that you have lost on. It may be a great idea, as the stock should be going up. But it might be a bad idea. The concept was brought up in the movie “Boiler Room”, and it was a bad deal in the end. The stock just kept going down. By staying out, the investor could have cut his loss. By buying back in to increase his “dollar cost average”, he just lost more.