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A real life example of dollar cost averaging On
Jan 1, 1992, one person invests $3,000 in the T. Rowe
Price S&P 500 Equity Index Fund. Five years later, with
the fund yielding an average 16.82 annual return, this
investment has grown to $6,488.
Another investor, not having $3,000 to plunk down all
at once, elected to invest $50 each month in this same
fund. Over these same 5 years, a total of $3,000 was
also invested.
But since only $50 was originally put to work, and
then a total of $100, $150, and so forth, this
investor's account had grown to "only" $5,010. But due
to dollar cost averaging, with his $50 buying more
shares when they were cheap and fewer shares when they
were expensive, his average annual return was 19.45%
Note that the same $3,000 "invested" in 1992 in a
bank CD (where you are actually loaning your money to
the bank) would have grown to only $3,270 over the same
5 years, just one-half of what the S&P index fund
yielded. |
