Dollar Cost Averaging is a simple technique that you just need to invest fixed amount of money periodically. It could be monthly, half yearly, yearly and etc. You can apply this on stock or unit trust investment. It will benefit you if:
Buy MORE units investment at LOWER prices
Most of the time, it will reduce your risk during market downtime. As long as the market goes up again in the future, then you will earn more. But of course if the market never goes up, you will keep losing and that’s the whole point the dollar cost averaging is for long term investment strategy which you believe the market will go up in long run.
It is not 100% guaranteed that dollar cost averaging can earn you some profits. There might have certain risk especially if you use it wrongly on the wrong stock/fund. On the other hand, if you use correctly, then it’ll be a great strategy for long term return.
Dollar Cost Averaging Example
Let’s take a look at below example of using dollar cost averaging. It’s a breakdown into monthly payments instead of investing one lump sum.
In this example, you can see that as the price per unit goes up you can buy fewer units, and as the price per unit goes down you can buy more units. The average unit price is 0.20, which is less than the unit price during January. In this example, dollar cost averaging comes out ahead of investing in a lump sum.
However, I cannot conclude that dollar cost averaging is better than lump sum investing. This is because lump sum investing also can result in better returns over the long run as you can have your money longer in the market. And, dollar cost averaging also means making more transactions, which can result in higher transaction charges.