Sep 4th, 2008
An Example of Regular Investment: Apple, Inc.
One of my favorite companies is Apple, Inc.; I’ve used their products since high school and I believe in their business. In the last few months, I’ve backed this in a very significant way: I’ve become a stockholder. Instead of putting a large amount of money into the stock at one time, my holding of AAPL has been one that’s been built monthly, through Sharebuilder. While this seems like dollar cost averaging (and in many ways is identical), it really isn’t dollar cost averaging. Dollar cost averaging would imply I have a large amount of money available at one time and buy into the stock at a fixed dollar amount on a regular basis (monthly, for our purposes). However, I really didn’t have a large amount of money to put in at once, so this is actually an example of regular investment of a set amount of dollars.
I began buying into Apple early this year, in February. I bought a fixed amount each month, and am continuing to do so. When I started, I got the stock at an effective price (includes the commission of $4) for $118.73. As I write this, the stock closed on Friday at $169.53. I could have had a very healthy gain of almost 43% right now had I bought all of my shares that day! However, since I’ve been buying into the stock regularly since then (once a month), I’ve also gotten shares for the effective prices of $141.78, $164.53, $186.57, $176.63, $155.00, and $176.75, so I’ve bought it above the current price three times and below the current price four times. All told, my investment in AAPL is up 8.22% for the year which is tremendously better than the market as a whole but considerably worse than the nearly 43% had I bought everything in February. So does that mean that investing on a regular basis is a bust?
Not necessarily. While many (including myself) are dubious of the risk reduction claims of the dollar cost averaging approach, it appears to have taken hold here. Yes, my returns were far worse than had I bought in February, but had I bought into the company at the start of the year (well, January 2nd, since markets were closed on New Year’s Day), it could have been at the price of $199.27; instead of having that 8.22% gain, I’d have a 14.9% paper loss!
In the end, I think that the lesson behind investing regularly is that doing it helps to assure that you develop a valuable financial habit rather than reducing risk or maximizing gain. Yes, it’s nice to have big gains and reduce risk, but it’s not clear this approach will do either. What it will do, however, is get you to put away money regularly–which is one of the real keys to successful investing.
