Let’s say Quentin finds a stock he thinks might do well in the long term, so he wants to follow this strategy. He invests $1000 in the stock on the first of each month, whatever the price
The stock’s price when bought is known as the buyer’s cost basis. Dollar-cost averaging aims to lower the average cost basis over time, such that there are minimal losses and maximal gains.
$12,000 invested over a course of a year, no matter the price, bought Quentin a total of 315 and a fraction of a share, as we can see from the table.
At the most expensive price (the highest cost basis), in May, the whole year’s investment budget used up at once would only have given Quentin 108 and a fraction of a share—about a third of what he actually bought.
At the cheapest price (the lowest cost basis), in September, spending the whole year’s investment budget, Quentin could’ve bought more than 2047 shares— almost 6 and a half times more than he ended up buying.
This is the volatility of the market, admittedly to an extreme (the prices were randomly generated in Excel and aren’t actually reflective of any real stock), but it serves an illustrative purpose here: to show that, buying the $1000 worth of stock whatever its price, and doing so consistently, gave Quentin an average cost basis which was cheaper than the actual price of the stock in 11 of the 12 months of the year in which he invested in that stock because Quentin was disciplined and put his $1,000 a month toward the stock every month.
Amount invested in the stock this month | Price per share | Shares | |
January | $ 1,000.00 | $ 71.98 | 13.89309 |
February | $ 1,000.00 | $ 98.20 | 10.18364 |
March | $ 1,000.00 | $ 49.28 | 20.29329 |
April | $ 1,000.00 | $ 83.72 | 11.94476 |
May | $ 1,000.00 | $ 110.49 | 9.050669 |
June | $ 1,000.00 | $ 56.21 | 17.78888 |
July | $ 1,000.00 | $ 76.54 | 13.06506 |
August | $ 1,000.00 | $ 76.98 | 12.99069 |
September | $ 1,000.00 | $ 5.86 | 170.5941 |
October | $ 1,000.00 | $ 101.81 | 9.821879 |
November | $ 1,000.00 | $ 91.07 | 10.9806 |
December | $ 1,000.00 | $ 68.81 | 14.53236 |
Total | $ 12,000.00 | $ 74.25 | 315.139 |
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When the stock price rises, Quentin buys less stock at a time because he’s fixed his budget for this stock at $1000 per month. But when the stock price, his same $1000 can buy more shares of the stock.
The stock’s price when bought is known as the buyer’s cost basis. Dollar-cost averaging aims to lower the average cost basis over time, such that there are minimal losses and maximal gains.
$12,000 invested over a course of a year, no matter the price, bought Quentin a total of 315 and a fraction of a share, as we can see from the table.
At the most expensive price (the highest cost basis), in May, the whole year’s investment budget used up at once would only have given Quentin 108 and a fraction of a share—about a third of what he actually bought.
At the cheapest price (the lowest cost basis), in September, spending the whole year’s investment budget, Quentin could’ve bought more than 2047 shares— almost 6 and a half times more than he ended up buying.
This is the volatility of the market, admittedly to an extreme (the prices were randomly generated in Excel and aren’t actually reflective of any real stock), but it serves an illustrative purpose here: to show that, buying the $1000 worth of stock whatever its price, and doing so consistently, gave Quentin an average cost basis which was cheaper than the actual price of the stock in 11 of the 12 months of the year in which he invested in that stock because Quentin was disciplined and put his $1,000 a month toward the stock every month.
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