Using dollar-cost averaging to make scheduled investments

Using this investment method could be a smart way to steadily pursue your goals while potentially saving you time and money.

Key points

  • Dollar-cost averaging can help you build up your portfolio by investing small amounts on a regular basis, usually in mutual funds
  • This way, you can potentially acquire more shares at a lower average cost than if you buy them all at once
  • Merrill offers automated services to help simplify dollar-cost averaging
Forming good habits takes discipline and commitment. One way to develop the habit of putting away money regularly is an investment method called dollar-cost averaging.Footnote 1 Using this method means setting up investment purchases, usually with mutual funds or index funds, of a fixed amount over time. As part of your regular budget, this approach can help you pursue your long-term financial goals, like saving and investing for retirement.
A key advantage of this method is that it can help reduce the impact of market volatility by buying more shares when prices are lower and fewer shares when prices are higher. It also frees you from having to decide when to buy. Over time, this tends to reduce the average cost of all the shares you buy — which may improve your long-term investment results.

How dollar-cost averaging works

Assume an investor, Brenda, wants to invest $100 a month from her pay. As shown in the table below:
  • The price of one mutual fund share is $10 in April, $15 in May and $13 in June
  • Brenda purchases $100 worth of shares each month at the price per share noted above
  • By using dollar-cost averaging, Brenda ends up with 24.4 shares at an average cost of $12.32
  • This makes her average cost per share 35 cents lower than the average price per share because Brenda's fixed monthly investment buys more shares when prices are lower
  Amount
in­vested		 Price
per share		 Shares
pur­chased
April $100 $10 10
May $100 $15 6.7
June $100 $13 7.7
Total $300 $12.67Footnote asterisk *
$12.32Footnote double asterisk **		 24.4
Footnote asterisk * $12.67 is the average price per share Footnote double asterisk ** $12.32 is the average cost per share using dollar-cost averaging Hypothetical results are for illustrative purposes only

How dollar-cost averaging stacks up to lump-sum investing

To see how investing your money at regular intervals over time compares with investing the same amount all at once in a single lump-sum, consider this example:
  • Andy invests $300 in May, purchasing a total of 20 shares at $15
  • Brenda invests $300 using dollar-cost averaging over three months, purchasing a total of 24.4 shares at an average cost of $12.32
Even though Andy and Brenda each invested $300, Brenda ended up with 22% more shares at an 18% lower average cost per share than Andy.
  Amount
in­vested		 Price
per share		 Shares
pur­chased
 
Andy
Brenda
Andy
Brenda
Andy
Brenda
April — $100 — $10 — 10.0
May $300 $100 $15 $15 20 6.7
June — $100 — $13 — 7.7
Total $300 $300 $15Footnote asterisk *
$15Footnote double asterisk **		 $12.67Footnote asterisk *
$12.32Footnote double asterisk **		 20 24.4
Footnote asterisk * $15 and $12.67 are the average prices per share for Andy and Brenda, respectively. Footnote double asterisk ** $15 is the average cost per share for Andy. $12.32 is the average cost per share for Brenda. Hypothetical results are for illustrative purposes only
Through dollar-cost averaging, Brenda was able to buy more shares at a lower cost per share than Andy.
If Andy or Brenda had bought all the shares in April at $10 per share, his or her total cost per share, of course, would have been less than the average cost per share over a three-month period. However, dollar-cost averaging spares you from having to choose the ideal time to buy and makes it easy to invest small amounts by providing a convenient way to help you pursue your financial goals over time.

How to implement dollar-cost averaging

One way to use dollar-cost averaging is by manually moving your cash from your bank account into your Merrill account on a fixed schedule of your choosing and then purchasing shares in a mutual fund.
To help simplify this investment strategy, Merrill offers its automatic investing plan. With a Merrill investment account,Footnote 2 the plan automatically invests fixed dollar amounts on a regular basis from the cash available in your Merrill investment account. You decide on the frequency, dollar amount and mutual fund to continually purchase.
Of course, you need to ensure there is sufficient cash in your Merrill account to make the purchases. You can set up recurring transfers to easily move money from any other Merrill Cash Management Account (CMA), Bank of America account or other financial institution account on a regular ongoing basis.
Keep in mind, no investment technique is foolproof. However, dollar-cost averaging, coupled with Merrill's Automatic Investment Plan and its funds transfer services could help you put money away to pursue your goals. Plus, over time it could potentially reduce the average cost of the shares you buy — which may improve your long-term investment results.
Next steps

Footnote 1 A periodic investment plan such as dollar-cost averaging does not ensure a profit or protect against a loss in declining markets. Such a plan involves continuous investment in securities regardless of fluctuating price levels; investors should carefully consider their financial ability to continue their purchases through periods of fluctuating price levels.

Footnote 2 No investment plan is risk free, and a systematic investment plan does not ensure profits or protect against losses in declining markets. This program is recommended for long-term investing in mutual funds. Since Automatic Investment Plans (AIPs) involve continual investment in securities regardless of fluctuating prices, you should consider your financial ability to continue investing through periods of low-price levels.

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Your AIP purchases may be on margin. Borrowing on margin and using securities as collateral involves certain risks. Margin is not appropriate for all investors. Please refer to your Margin Agreement, which outlines the risks associated with borrowing on margin.

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