Question about Cost Dollar Averaging

[SimpleGaijin]

Hello fellow Mustachians,

I was wondering if somebody could give me their opinion on cost dollar averaging (CDA). I think I have a solid understanding of it, but I want to be sure if I really do get it.

With my Vanguard Roth IRA, I've set up weekly payments that will max out my Roth IRA to the $5,500 limit. As such, the CDA kicks in because of market volatility and it spreads out the risk over the course of the year.

I have alerts from Vanguard that tell me the closing price of the at the end of the trading day that are automatically texted to me. With this in mind, when I get an alert that a unit's price falls to a certain amount, the text will kick in. Since I have automatic payments, the amount needed each week would be adjusted to keep it at the $5,500 annual limit.

My question is this. If (hypothetically) I buy extra units at my designated lower price, would that be adding to my average, or something else entirely?

[Frugalman19]

I think you mean Dollar Cost Averaging (DCA). If you do, then no, you wouldn't factor in the investments you make at a none predetermined time. Youre simply trying to time the market and trying to buy low. DCA is a systematic purchase that happens no matter what, and the average price you pay for a security is lower than the actual average price of the security because you bought more when the price was lower and less when the price is high.

Hope this helps, just keep saving. Worry about your rate of return in 20 years.