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.
It is all about timing in equities investment and therefore DCA eliminates the possibility of going all in in the wrong time (and of course limit the gain on going in on the right time, but chances are low due to fear factor).
DCA also suitable for most working adult with “some amount of money” every month which is too small for direct investment in share market.
Ya..I think it’s very subjective. We cannot compare between DCA technique and one lump sum investment directly as it depends on ‘when’ you invest in.
this technique will work when you save your money consistently and your money will grow up.
[Amended / Correction]
Man.. I really dun understand how the DCA method can really works or not since the beginning. I found out that many ppl are using and recommended that method, why?
Can’t we just dump certain lump sum once we see the price is low.? Will this method recommended.?
Rayz, you can do that. But when is the lowest price? Most of the ppl will use up their money while waiting for the lowest price. hahahah……
Let me share a few pointers.
Age : 20 – 40
Type : Equities
Style : Dollar Cost Averaging
The theme here is to create wealth, therefore equity is the way to go. At this period, you just start working, maybe starting a family, there’s many uncertainties along the road. Therefore set aside surplus cash for emergency. Invest small but regularly. Don’t invest large amount lump sum unless you have staying power. Market is full of ups and downs. People who invested in equities in early 2008 needed almost 3 years just for the investment to break even.
Age : 40 above
Type : Fixed Income
Style : Lump sum
The theme here is preservation. You have spent your younger days growing your wealth, now to preserve what you have.