# What Is Dollar-Cost Averaging?

An inherent risk of mutual funds is the fluctuating price of shares. Shares that were purchased on Monday for \$9.50 may be selling for \$9.35 on Tuesday or \$9.58 on Thursday. These fluctuations occur because the prices of the securities held by the fund will change based on activities in the securities markets.

Dollar-cost averaging is one way to help smooth out the effect of market fluctuation and occurs when investors make contributions to their account on a regular basis. Dollar-cost averaging involves investing the same amount of money at regular intervals, usually monthly. A convenient way to do this is for investors to have money transferred from their bank account each month for the purchase of mutual fund shares.

The result of dollar-cost averaging is that more shares are purchased when the price is low and fewer shares are purchased during periods of higher prices. In the end, the average cost per share should be lower than the average share price. By investing through dollar-cost averaging, the investor decreases the risk of making a lump sum purchase at an inopportune time. See the chart below for an example. Dollar-cost averaging does not, however, assure a profit or protect against loss.

Hypothetical Illustration of Dollar-Cost Averaging

Investment Date Amount Invested Share Price # Shares Purchased
January \$100 \$10.00 10.000
February 100 9.78 10.225
March 100 10.40 9.615
April 100 9.62 10.395
May 100 10.50 9.524
June 100 10.75 9.302
July 100 9.87 10.132
August 100 10.75 9.302
September 100 11.10 9.009
October 100 11.50 8.696
November 100 11.30 8.849
December 100 11.25 8.888

Totals
Amount Invested:
\$1,200
Average Price:
\$10.57
Shares Purchased:
113.937
Average Cost Per Share:
\$10.53

The chart above is intended to illustrate the mathematical principle of dollar cost averaging. This hypothetical example is for illustrative purposes only and doesn’t represent any specific type of investment. It doesn’t include the impact of expenses or fees, which would have reduced the results of the illustration.

After investing for 12 months, using this example, the average cost per share is lower than the average price and the current cost per share.

## How To Take Advantage Of Dollar-Cost Averaging

There are many ways an investor can take advantage of dollar-cost averaging. A common method is payroll deductions for an employer-sponsored retirement plan such as a 401(k) plan funded through mutual funds. A predetermined amount is deducted from an employee’s paycheck on a monthly basis and shares are purchased at that day’s offering price. The principle of dollar-cost averaging also applies to after-tax accounts.

When payroll deduction is not available, a person may elect to have an amount automatically withdrawn regularly from his or her bank account through electronic funds transfer (EFT). The purchase may be scheduled to occur twice per month, monthly, quarterly, or any way that is convenient to the investor.

The answer is an easy one: Talk with your registered State Farm® Agent who will discuss your current needs and opportunities and help you develop a plan to fit your goals. Simply click, call, or stop by an office in your neighborhood today!

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The Russell 2000® Index tracks the common stock performance of the 2,000 smallest U.S. companies in the Russell 3000® Index.

The Russell 2500 Index tracks the 2,500 smallest companies in the Russell 3000 Index.

The Russell 1000 Index is a stock market index that represents the highest-ranking 1,000 stocks in the Russell 3000 Index.

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