Friday, June 24, 2011

Dollar Cost Averaging & Dividends

A savvy way to invest/reduce risk of market swings, plus pay yourself back!!...... i thought that would get your ears up (lol) The joint power of constant Dollar Cost Averaging and Reinvesting Dividends will result in your "real cost" ( what you paid in) to be lower, that in time with any uptick in equities creates a nice profit. To explain; Dollar Cost Averaging is buying a set amount of investment each month and thus provides insulation against changes in market price. Say we put in $100 per month and the unit cost $10 in January and so we get 10 shares, same $100 in February and the unit price drops to $5.00, so we pick up 20 shares, March, $100 goes in and the unit price has bounced back to $7.50 per unit and we get 13.34 shares. Now looking at this from afar, you say i started out at $10 per share, fell to $5 and rebounded to $7.50, I've lost money, but wait....... that's the magic of Dollar Cost Averaging as you picked up more shares when the price was down during those months. So you ended up with 43.34 shares x $7.50 ( March Unit Price) = $325.00 and your "real cost" was $300.00  Next we buy units that pay a dividend (which is when a company earns a profit and it distributes up to 4x per year) Say Company xyz paid you a $50 dividend for its 1st Quarter in February, so you would of received 10 shares ($5 Feb unit price into $50) again this will bring down your "real cost" as you have more total units. Now if investing larger amounts per month, the entry point into the market is key, this is where a good investment company comes into play. Also ask/watch the management expense ratios (MERs) or sales commissions ( front end loads and deferred sales charges) as these fees can put a huge dent in profits. In Canada, we have some of the highest mutual fees in the world
and most are hidden or never seen on your statements!!

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