Example of Dollar Cost Averaging

The term Dollar Cost Averaging refers to a method of buying an investment by spending a fixed dollar amount at regular intervals. The reason for investing this way is to avoid risk in volatility in the market. If the market is going up and down over time and you were to make one large sum purchase then you might randomly hit a high or low point in the market. If you luck out you might hit the market just right and buy at a low, or you might have poor luck and buy at a temporary high value.

For a simple example, consider a stock that trades at the following prices over a few months:

January : 105
February : 110
March : 115
April : 145
May : 140
June : 125

If you bought this stock on April you'd pay the most at 145 but if you bought in January you'd pay the least at 105. If you dollar cost averaged then you'd pay an average of 123.3.

For a real world example, lets look at the past few years of the S&P 500. I get historical prices of S&P from the Yahoo finance site. (in this example I'm looking at monthly values to simplify things) Each year the index had highs and lows. If you were trying to time the market or randomly buying then you might do well if you bought at lows and you might do poor if you bought at highs. For the past 5 years the annual highs and lows of the S&P 500 were approximately:

	Minimum	Maximum
2008	998.01	1400.38
2007	1406.82	1549.38
2006	1270.09	1418.3
2005	1156.85	1249.48
2004	1101.72	1211.92

Graphically here are the highs and lows for each year compared to the S&P500 values per month :


If you were to invest $1000 a year and you timed things just right to hit the minimums then you'd have bought low and seen the best return. Buying $1000 of an index at the low points would give you $4,265 worth today. If on the other hand you timed things poorly and bought at the highs, then you'd have just $3,690 today. To avoid this volatility and average out the cost of your purchases you could invest $1000 / 12 or $83.33 each month. This would be an example of dollar cost averaging. If you instead bought $83.33 each month then you'd have about $3,804. This gives you an average value somewhere between the maximum and minimum.

So that gives you a Maximum of $4,265, result of Dollar Cost Averaging of $3,804 and Minimum of $3,690. As you can see the Dollar Cost Averaging method would have given you an average result.

Reference: Dollar Cost Averaging

Municipal bond rates are looking good

The yields on municipal bonds have been edging up lately. The Composite Bond rates at Yahoo shows a rate of 5.57 for a 20 year AAA rated municipal. If your marginal tax rate is 30% then that equates to a 8% taxable rate.

Good info on savings and CD rates at Bank Deals blog

The Bank Deals blog tracks high interest savings and CD rates. They have frequently updated posts with deals on CDs and savings.

They do a weekly summary of rates and best deals like their October 4th weekly summary. You can see the deals in your state or look for national deals.

If you're looking for a good rate on a savings account or CD then check out Bank Deals blog.

Current UpDown performance = down 8%

My UpDown account is currently down about 8% since I started in March. Last time I reported my performance on UpDown I was down about 1%. I was down to 14% but it rebounded a lot today.

By comparison the S&P 500 is down about 25% in the same period. So I'm still beating the index by a pretty wide margin.

I bought some AT&T and GE. Both are trading at pretty low values and have decent dividends with both currently yielding over 6%. I figured that you couldn't go wrong with these blue chips and buying them at a low price would be a long term winner.

I also bought more of the Glimcher REIT (GRT). It dropped into the $5 range and its dividends were yielding over 20%. Nothing had changed in the companies financials so it was even more of a good value at this point. That >20% dividend yield was very attractive.