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Stock Strategy: Monopoly Dollar Cost Average

The world of investing can be filled with obscurity to the extent young investors are foggy on understanding certain market conditions; most importantly taking preventative measures by mitigating large risk factors. Let us imagine yourself along with a few of your collegues playing Monopoly, and you take the strategic route of buying everything you land on your first few rounds, more often then not it ends up in you being strapped for cash. When you could have easily waited for someone else to land on it and win it in an auction for often a cheaper price. This is very similar to the way the strategy Dollar Coast Average works.  

Dollar Cost Average (DCA) is a common tactic used by savvy investors who understand the value of averaging out their position on a stock. Now what does all this mean? Basically imagine buying a quarter of gas every couple days for two weeks. The first day the price is $2.65, the next time you fill it is $3.00, then $2.55 and finally $2.00. You have filled a full tank with an average cost of $2.55 (2.65+3.00+2.55+2.00/4) so instead of paying $2.65 for a full tank you actually paid $2.55 for a full tank saving 10 cents. Now, ludacris to do this with gas because it is something that you need to go from point A to point B right away; but when it comes to stocks, which are typically something you are looking at for a longer term than it is an amazing strategy to help mitigate your risk and get you the most bang for your buck. 

Stock Example: You have $5,000 that you have allocated for buying Stock A which is priced at $100 a share. Now without using DCA you would end up buying 50 shares and spend all $5,000 at one time. Now, lets say that you decide to use DCA and buy A throughout 5 weeks ($1000 a week). First week it is $100 and you buy 10 shares, now the next week it is $102 and you buy 9.8 shares, third week A takes a dive on weak earnings and it is now at $95 and you buy 10.52 shares, fourth week roles around and A drops a little more to $92 and you buy 10.86 shares, and finally on the 5th week there is an upswing and A goes up to $98 and you buy 10.2 shares. DCA leaves you with a total of roughly 52 shares at $98 and your value is $5,096 versus $4,900 basically you are up $96.00 instead of down --$100 just by spreading out your risk. Now this is shown on a very small level but the larger amounts the more of an impact DCA has.

So like Monopoly, the whole idea is to withstand the craziness of the game, no one can predict how the game is going to go or what you will roll. But you can control your exposure and risk in the game. This strategy more often then not helps you win the elusive title of Monopoly and your little dog piece will do a dance in celebration.

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