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Dollar Cost Averaging - A Strategy For Making The Most Out Of Fluctuating Gold Prices

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Dollar cost averaging is a strategy that lessens the risk of investing a large amount in a single investment or portfolio at the wrong time. It is especially worth considering when markets are volatile. This recent blog post by precious metal experts APMEX explains the fundamentals of dollar cost averaging as a way to avoid mistiming your entry into the market.

“When investing in gold, it’s only natural to think in terms of cost per ounce.  Many people see the price of gold and decide to jump in. They make a one-time investment, and wait for gold prices to go up.  While gold has indeed trended up throughout 2011, there is a natural fluctuation in pricing.  It goes up and then down and then up again.

There’s a way of using the fluctuating price of gold to your advantage and it’s called dollar cost averaging. Instead of making a single investment, you invest a fixed amount on a fixed schedule.

Here’s an illustration of how it might work. Say an investor has $12,000 to invest, so using dollar cost averaging they decide to invest $1000 per month in Stock ABC. The first month Stock ABC sells for $50 per share, so the investor purchases 20 shares. The second month Stock ABC is $25 per share, so the $1000 can purchase 40 shares. The third month, stock ABC is up to $40, so they can purchase 25 shares. All together, they now own 85 shares of Stock ABC at the average per share price of $35.29.

If this investor had spent the entire $12,000 up front they would have paid $50 per share, but by dollar cost averaging after three months, they only paid $35.29 per share. If investments only went up, this would not be an advisable way to invest, but in a market environment where there has been a great deal of volatility like we have seen in 2011, dollar cost averaging will help reduce risk.

Dollar cost averaging is an especially prudent investment strategy for gold and silver. Make a commitment to how much you can spend on a weekly, monthly or quarterly basis and then simply follow through. We have all heard the adage that you cannot time the markets. Dollar cost averaging accepts this as truth and gives an investor a simple plan to follow.”

This article courtesy of APMEX.

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