Stock Market Investing 10 Minute Guide

Constant Dollar Averaging

Frankly, I'm not a big fan of constant dollar averaging. It's just too much work, not to mention too complicated math-wise. But, in the spirit of fairness, you, the investor, should be made aware of it so that you can decide whether it is appropriate for your own needs.

Using constant dollar averaging, an investor buys a set number of shares of stock, and adds to and subtracts from the amount invested in that stock to keep the amount of stock constant. As the price declines, the investor adds to the investment; as the price of the stock increases , the investor withdraws excessive cash.

Plain English

Constant dollar averaging is an investment strategy whereby the investor adds or subtracts cash as necessary to keep the number of original stock purchased constant.

Success using the constant dollar averaging strategy is based on the assumption that as the value of your investment increases, you (the investor) collect its proceeds. This makes constant dollar averaging particularly attractive to investors who are looking for income from their stocks. As a novice investor, however, you will be charged with the responsibility of determining on a regular basis the fractions of cash and stock that will keep the stock level constant. In addition, by withdrawing the proceeds of your investment, you will deprive yourself of the power of compound interest. I'm not even going to mention the broker fees involved, but suffice it to say they are substantial and require serious consideration in this type of investment strategy.

For those reasons, while I'm not against constant dollar averaging, I just can't find a use for it in my own portfolio or in that of the novice investor.

The 30-Second Recap

• Determining your investment strategy, or how you will select your stock, is rarely as simple as selecting a predetermined set of rules and formulas. Instead, it should be composed of portions of various plans which are most appropriate for your particular situation.

• Recommendations are an investment strategy by which investors select their stock based on the outlook of, or the rating given by other people who may be in a better position to evaluate the company and its stock.

• Research as an investment strategy implies that the investor makes his or her stock selection based on the information uncovered by any number of sources the investor may consider relevant.

• Buy and hold is an exceptional investment strategy whereby an investor purchases stock and lets that decision stand for an extended period of time. In addition, buy and hold usually implies that any profits made from the stock such as dividends will be reinvested in subsequent purchases of the stock.

• Dollar cost averaging is an investment strategy whereby a person systematically invests a predetermined amount on a regular basis. Through the regular purchases of stock dollar cost averaging, a newer investor or one with little money initially can amass a sizeable portfolio over time.

• Constant dollar averaging is an investment strategy whereby the investor adds or subtracts the amount of cash necessary from his stock portfolio to keep the original number of stock purchased from fluctuating. This strategy is particularly popular with investors looking for regular income from their investments.