A risk of mutual funds is the fluctuating share price. 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 in a fund will change based on activities in the markets.
Dollar-cost averaging is one way to help smooth out the effect of market fluctuation. It occurs when investors put the same amount of money into their account on a regular basis. Transferring money from a bank account to purchase mutual fund shares is a convenient way to do this.
The result of dollar-cost averaging is that more shares are purchased when the price is low and fewer shares are purchased when prices are high which should make the average cost per share lower than the average share price. Using this method, you can decrease the risk of making a lump sum purchase at an inopportune time. Dollar-cost averaging does not, however, assure a profit or protect against loss.
Hypothetical Illustration of Dollar-Cost Averaging
After investing for 12 months, using the example below, the example below, the average cost per share is lower than the price and the current cost per share.
|Investment Date||Amount Invested||Share Price||# of Shares Purchased|
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.
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 investing a fixed amount regularly through a pre-authorized chequing account (PAC). A predetermined amount is deducted 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.
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Mutual Funds are not insurance products and are distributed through representatives of State Farm Investor Services (Canada) Co. State Farm Investor Services (Canada) Co. is a separate legal entity from State Farm Mutual Automobile Insurance Company, or any of its insurance affiliates.
Please read the applicable Fund Facts before investing. Commissions, trailing commissions, management fees, and expenses may be associated with mutual fund investments.
Mutual Funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.
Neither State Farm nor its agents provide tax or legal advice. Please consult a tax or legal advisor for advice regarding your personal circumstances.
State Farm Investor Services (Canada) Co. Aurora, Ontario.