Generate Higher Returns on Auto-Pilot With Dollar-Cost Averaging

Vita-NelsonDoubtless, you’ve heard that you should “Buy low and sell high”. That’s a great strategy, but how do you do it without a crystal ball?

Well, there is a way to very effectively do it although it’s not widely known. That way involves using Dividend Reinvestment Plans, also known as Direct Investment Plans (DRIPs).

DRIPs make it feasible for you to invest small amounts of money on a regular basis.  (I say feasible because, by investing through no-fee DRIPs, your investments are not compromised by transaction costs.)

Many DRIPs do not charge fees for investments or reinvestments. Therefore, it’s efficient, from a transaction cost point-of-view, to make regular investments over a period of time instead of buying your shares at one time for one fee.

With that said, now you can consider the advantages of investing regularly to build up holdings as compared with investing a lump sum at one time.

For one thing, you reduce your risk of buying at exactly the wrong time. By investing the same amount regularly, you will be buying shares at lots of different price points. In fact, you will be doing even better than that–as I will explain in a minute.

Investing in this manner is called “dollar-cost averaging.” By following a dollar-cost averaging strategy, you don’t need to be glued to the screen watching price movements. You can relax with the knowledge that you are following a simple, time-tested strategy to build substantial wealth.

One of the Most Successful Long Term Investing Strategies

Revered by billionaire investor Warren Buffett as well a broad range of financial experts, dollar-cost averaging is one of the most successful long-term investing strategies. No-fee DRIPs make this strategy accessible to small investors.

Otherwise, to follow a dollar-cost averaging strategy, you’d run into lots of problems. You wouldn’t want to routinely pay a commission to buy stock in the same company. And even if you did, you can’t call your broker and say you want a $100 worth of stock (or, for that matter, $500, $1,000, or $10,000 worth of stock).

That’s because, with a broker, you designate shares to buy and with DRIPs, it’s the other way around. You designate the dollars and get shares (and/or fractions of shares) depending on the share price. That’s an important difference.

Why is this strategy so appealing? This strategy virtually forces you to “buy low.” Your regular investment amount results in more shares for you when prices are low and fewer shares when they are high. The result is that the cost of the shares you acquire will be even less than the average price during the investing period.

That’s because you automatically bought more shares when the price was relatively cheap and fewer when it was selling high.

What’s more, dollar-cost averaging helps you withstand the impulse to buy or sell with the crowd—which is what most investors do—and which is why most investors lose money in the stock market.

Dollar-Cost Averaging Boosts Results

Take a look at the illustration below to see how routine regular investments will actually cause you to buy more at low prices than you will at higher prices. But keep in mind that these advantages are reserved for those who invest through no-fee DRIP.

Of the nearly 1,300 stocks that provide direct investing through a company-sponsored DRIP, 700 of these top-rated U.S. companies offer a No-Fee DRIP.

We do not recommend that you follow a dollar-cost averaging strategy if the stock does not offer a DRIP and/or if you intend to invest small amounts and the DRIP charges high fees.

Otherwise, the fees you pay on your routine investments will end up enriching the transfer agency for the company or your stockbroker’s investment account. That’s not the use you want to make of the money that could be used to build holdings in your account.

Dollar-Cost Averaging Illustration

This illustration assume you invest $100 each quarter, which will buy however many shares you are entitled to based on the market price of the stock. In our example, the share price fluctuates between $9 and $35.

That means that the average price per share for the four investments was $21.50. Your average cost will be less. That’s because your four $100 investments bought more shares when the price was low. Your average cost per share turns out to be only $15.60.

Your $100 investment bought more shares when the price was low and fewer shares when it was selling at the high prices. Isn’t that exactly what you want to do?

For your convenience, here’s a complete List of No-Fee Direct Investing Plans (DRIPs) that do not charge fees for investing, or reinvesting dividends.

Vita Nelson is an acknowledged authority on the operations of company-sponsored direct investment plans (DRIPs).