Investment Goals with Dollar Cost Averaging
Considering the discussion in Chapters 2 and 3, it is clear that pursuing a so-called fixed-amount formula investment strategy is not the right way to accumulate market wealth over time. If you fail to take steps to keep pace with long-term market growth, then you will also fail to maintain a reasonable market exposure. Your stock market holdings could dwindle over time as a consequence of adhering to a mathematical formula that wouldn't make sense in the long run. The goal of this chapter on dollar cost averaging (and the next one on value averaging) is to provide the long-term investor with some idea of how investment goals relate to the numbers chosen for formula investment strategies. With a little work, you should be able to use this information to decide, for example, what monthly investment would be necessary to establish a college fund for your newborn, and how to adjust the amounts for later changes.
The simplest case to start with is a lump-sum investment. Even though this book has focused on accumulation strategies involving a series of investments, each of these series is composed of many little lump-sum investments. Suppose you invested $C (cash investment) now at a rate of r% (rate of return) for one period. At the end of the period, your future value, V, would be:
For example, if your investment ...