Understanding dollar cost averaging

One powerful tool that we have as investors is the technique known as dollar cost averaging, the process of investing in periodic contributions over time rather than all at once. By doing so, we can guard against the frustration of buying a stock at its peak only to see the price come crashing down. And there’s also a benefit that may not be obvious at first. Let me explain:

Let’s say we have $3,000 to invest in a mutual fund. But instead of investing it all at once, we’re going to spread our purchases out into three equal $1,000 buys over three months. The first month, the price per share is $50. In the second month, the price has increased to $150. And in the third month, the price has fallen to $100. You might think that your average cost per share would be $100, since that’s the average of the three purchase prices. But a quick check of the math shows that our actual cost per share is $81.82.

$1,000 per purchase

$50 share price = 20 shares

$150 share price = 6.67 shares

$100 share price = 10 shares

Total spent is $3,000 on 36.67 shares, for an average cost per share of $81.82.

Why does this work? Because we bought more shares at the lower price and fewer shares at the higher price. This is one of the reasons why making regular investments, such as payroll deductions for a 401(k) plan, can be such an effective tool for building wealth.

DISCLAIMER: Wendell the Pug is a noncertified financial planner who does not possess a 401(k) and, in fact, has never actually held down a paying job.

Luck's role in our financial fate

I recently read a quote by the always eloquent Warren Buffett that I thought nicely summed up the role luck plays in our financial lives. It comes from this article at CNNMoney.com about the billionaire investor's pledge to donate his wealth to charity. 

"My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. I've worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions. In short, fate's distribution of long straws is wildly capricious."

DISCLAIMER: Wendell the Pug has never met Warren Buffett but is pretty sure he'd give a good belly rub. Or at least hire an assistant to give one. 

How to be a salary snoop

Have you ever wondered how much money your co-workers were making -- and whether you were being paid a fair salary? You may be able to find out at a website called Glassdoor.com. The site lets workers anonymously post their salaries, as well as reviews of the employer. So you can search for the name of your employer -- or perhaps a company where you're interviewing for a job -- and find out how much cash people in similar positions are bringing home.

DISCLAIMER: Wendell the Pug is not in any way affiliated with Glassdoor.com; nor does he collect a salary to post there. 

Dial up some cellphone savings

I recently read a story about how more and more Americans are opting for prepaid wireless service over a monthly cellphone plan, and this is a great way for many of us to save money. If you're locked into a plan buying, say, 600 minutes a month, yet you only use 300, you might be able to save by paying only for the minutes that you use. Prepaid service may also be a good option for people who use their phones primarily for texting and leave a ton of minutes on the table at the end of each month.

The fact is, many of us are paying for minutes that we're not using, so shopping around is a smart money move. Try visiting billshrink.com or myrateplan.com to compare options and find a plan or prepaid carrier that fits your calling needs.

And while you're at it, consider whether you really still need a landline home phone. At the Capitalist Pug household, we recently canceled our home service. The only difference we've noticed? We don't get those three or four annoying telemarketer calls a day anymore.

DISCLAIMER: Wendell the Pug does not own a cellphone. In fact, he is incapable of using one for any purpose other than as a chew toy.

Benefit from falling oil prices

Oil prices have fallen sharply in recent weeks, which could mean less of a hit on motorists' pocketbooks during the summer driving season. The European debt crisis and growing oil stockpiles have pushed prices down to $70 a barrel, a decline of about $15 from recent highs.

This is good news for many of us. But if, like me, you believe that these lower prices are not here to stay, then it becomes wise to seek a hedge for the eventual return of higher prices. And the time to do that is now, when prices are depressed. 

One option is to invest in oil production -- my favorite choice right now is ExxonMobil (XOM). The world's largest oil company has seen its share price decline along with the price of oil, and on Friday it was flirting with its 52-week low. The company boasts a very reasonable 8.4 price-to-earnings ratio and a projected dividend yield of nearly 3 percent. As of this writing, ExxonMobil is at $60.88 a share. Morningstar.com, a site I use frequently, contends its fair value is $87 a share and gives the stock its highest five-star rating. 

The time to buy is when prices are low. Then, if oil prices start to rebound in a few months and our cost to fill up the tank starts to rise again, we can take solace in the increasing value of our stock portfolio. 

DISCLAIMER: Wendell the Pug owns Exxon-Mobile stock and recently added to his holdings. He is also a 2-year-old puppy.

Goldbugs, beware

Rep. Anthony Weiner, D-NY, has issued a report accusing gold retailer Goldline International of ripping off its customers. If you've spent five minutes listening to conservative talk radio, you've probably heard of Goldline -- the company is a frequent advertiser for hosts like Glenn Beck and Mark Levine. I don't care what your personal political views are. But as your financial adviser, I can say that it's a bad idea to buy any asset that's been marked up substantially beyond its true market value. You don't buy a car for $40,000 when a neighboring dealership has the same model for $30,000, you don't buy mutual funds with exorbitant expense ratios, and you don't buy gold from Goldline. 


If you must invest in gold (and given that it's been flirting with all-time highs, I'm dubious that it's a great time to buy), you'd be better off looking elsewhere. Consider an exchange-traded fund that tracks the price of gold such as SPDR Gold Shares (GLD) or iShares COMEX Gold Trust (IAU), both of which feature a reasonable .40 percent expense ratio. 


DISCLAIMER: Wendell the Pug has not made any investments in gold, aside from his Mr. T starter set.