Real-World Example of Dollar-Cost Averaging
Joe works at ABC Corp. and has a 401(k) plan. He receives a paycheck of $1,000 every two weeks. Joe decides to allocate 10% or $100 of his pay to his employer’s plan. He chooses to contribute 50% of his allocation to a Large Cap Mutual Fund and 50% to an S&P 500 Index Fund. Every two weeks 10%, or $100, of Joe’s pre-tax pay will buy $50 worth of each of these two funds regardless of the fund's price.
The table below shows half of Joe's $100 contributions to the S&P 500 index fund over 10 pay periods. Throughout ten paychecks, Joe invested a total of $500, or $50 per week. However, because the price of the fund increased and decreased over several weeks Joe’s average price came to $10.48. The average was higher than his initial purchase, but it was lower than the fund’s highest prices. This allowed Joe to take advantage of the fluctuations of the market as the index fund increased and decreased in value.
Joe works at ABC Corp. and has a 401(k) plan. He receives a paycheck of $1,000 every two weeks. Joe decides to allocate 10% or $100 of his pay to his employer’s plan. He chooses to contribute 50% of his allocation to a Large Cap Mutual Fund and 50% to an S&P 500 Index Fund. Every two weeks 10%, or $100, of Joe’s pre-tax pay will buy $50 worth of each of these two funds regardless of the fund's price.
The table below shows half of Joe's $100 contributions to the S&P 500 index fund over 10 pay periods. Throughout ten paychecks, Joe invested a total of $500, or $50 per week. However, because the price of the fund increased and decreased over several weeks Joe’s average price came to $10.48. The average was higher than his initial purchase, but it was lower than the fund’s highest prices. This allowed Joe to take advantage of the fluctuations of the market as the index fund increased and decreased in value.
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