by Peter Coyne, Daily Reckoning
“I’d like to buy gold” says one reader, “and my friend told me to ‘dollar-cost average.’ What does that mean?”
Here’s our short answer…
Dollar-cost averaging is a “set it and forget it strategy.” You’re simply committing to pay the average cost for gold per ounce over time. That way, you don’t need to worry about timing the market.
All you have to do is buy a set dollar amount of gold regularly, no matter the price.
You’ll be able to buy fewer ounces when the price is high… but you’ll be able to buy more when the price is lower. This saves you from overthinking things… and from worrying about whether you’re getting a good price.
Here’s a fictional example to explain how it works (these gold prices will seem silly):
Suppose you commit to buy $2,000 worth of gold every single month.
In the first month, gold sells for $1,000 so you’re able to buy 2 ounces.
In the second month, gold trades for $500, so you’re able to buy 4 ounces.
In the third month, gold sells for $800, so you’re able to buy only 2½ ounces.
At the end of three months, you own 8½ ounces at an average cost of $706 per ounce.
By dollar cost averaging, you didn’t have to guess which way the price of gold was going or whether you’re missing out on a better opportunity.
The strategy smoothed out the price you paid.
We hope this helps,