I recently realized that my enthusiasm often drives me to go too fast and too deep when discussing financial topics with my medical colleagues - often I don't recognize I've overdone it until I see the "nobody home" sign in their eyes. So let's return to the basics with the 101 series. Today we're talking about "Dollar Based Investing", also referred to as "Dollar Cost Averaging."
What is it?
Traditional investing involves selecting an investment, decide on how many shares you want and then placing an order. However, most stocks have share prices that aren't whole numbers and they fluctuate constantly. For example, AAPL- $98.83, SBUX - $54.86 etc. "Dollar Based Investing" lets you specify a set amount to invest in - $50, $100, or $200 each month. So instead of buying 2 shares of AAPL at $197.66, you buy 2.024 shares for $200.
- Convenience - instead of putting in orders every time you want to invest, dollar based investing lets you put your investment on autopilot - say $200 in the S&P 500 index fund every month. We all know that saving regularly is a good habit, why not do the same with your investments.
- Same gains/loss - the amount you make or lose from your investments is determined solely by the amount you invest and the performance of your investment. For example, whether you buy 1 share of stock A at $1000/share, or 100 shares of stock B at $10/share. If the price of either stock goes up 10%, you gain $100.
- Not all brokerages offer the option of dollar based investing.
- Even when they do, they may charge different fees. So it behooves you to shop around.
Dollar based investing offers you flexibility in investing and make it easier for you to get into a good habit. Personally, I do my dollar based investing with Betterment - a low cost Robo-advisor that siphons off $200 each month from my checking account and invest it across a portfolio of stocks and bonds. See my full review of Betterment HERE.