WHAT IS “DOLLAR COST AVERAGING” AND WHY DOES IT WORK? Dollar cost averaging is a method of investing equal amounts of money regularly and periodically over specific time periods (such as $2000 monthly for 12 months) in a particular investment(s) or generally buying more shares of the same stocks when they decline in price.  By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. 

The primary benefit is to lower the average cost per share of the investment, giving the investor a lower overall cost average price for the shares purchased over time. Investors should note that Junior small cap mining stocks can have price volatility rates of 90% over a two year period, so if the fundamentals still justify investment, some may merit attention at low prices.

While we have huge volatility for the mining stocks, this is a strategy that few consider. Yet, it can reward investors.  After doing the required essential analysis and buying a stock, the investor will take advantage of declines as well by buying shares  at lower prices if they occur  A decline is often not a time to complain but to take advantage of the “sale on a particular stock.”

Fund managers regularly do it as regular cash inflows by investors are usually invested in their same universe of stocks. It is not that they want the shares to decline in price but that by buying while the stocks are down; it offers them to opportunity to enhance portfolio performance rather than wait for the return up in price.

For example,

Let’s assume that we are looking at a Junior mining stock XYZ Mines. let’s suppose that an investor does the required analysis and buys 5000 shares of XYZ mines at .60 cents at a cost of $3000. Perhaps it had already declined from $1.50 a share and at .60 cents, it seems to be a very undervalued stock, so the investor buys it. Then, the investor sits and waits………and sees it decline to what seems to be incredibly undervalued at .15 cents.

At the same time, “XYZ” mines, even at .15 cents, may have a large cash position of over $3,000,000 which for this example would be equal to .10 cents per share. The value of the company’s  gold reserves in ground (we will give them a value of $10 per ounce) may give us an asset value of $2.00 per share of those gold reserves. We may also have good exploration results on another project  and current buying of the company’s shares by the management. Those fundamentals may indicate that we may have a “sale on the stock” to take advantage of.

So the investor invests in $3000 worth of the shares and gets another 20,000 shares. The average cost for all the shares purchased drops to .24 cents. A return back up in XYZ’s price could be quite profitable. Naturally there are never any guarantees in investing, risk is always there.

Now you may ask as to “how many investors do it?” One study showed less than 5% of investors ever engage in “dollar cost averaging.” That will never change.

The old investor poem goes like this:

“When prices are high, they run to buy, when prices are low, they let them go.” Believe me, that will never change.