Dollar Cost Averaging
(DCA) is an investment technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer when prices are high.
We all know markets don’t go in a straight line. This is completely normal and is known as market risk/volatility. The best investors of our time will warn you, “Its time in the market, not timing” that matters and this fits in with the DCA methodology nicely.
How does it work:
Say you were given $10000 inheritance. Instead of throwing the whole lot into the market in one hit, you would invest $1000 a month for 10 months, no matter what the share price is. ie Month 1, share price = $35, Month 2, share price = $25 and so on.
The DCA strategy is a disciplined strategy. You have a plan and can stick to it removing all emotion. Don’t worry about the ‘right time’, the noise, the next market crash that the same guy has predicted every year for the last 10 years (he’ll get it right one day!)
“We don’t have to be smarter than the rest, we have to be more disciplined than the rest” – Warren Buffet.
Avoids Bad Timing
Timing the market is difficult. Sleep well with the DCA method and don’t worry about your next entry or exit point. With DCA you will be buying when the market is falling, rewarding you when it recovers (and vice versa) but in the long run, it will smooth out the ups and downs.
DCA works best over the long term. With the market swinging up and down over time this method allows you to invest with conviction and not worry about timing. This reduces risks by buying in falling markets, investing regularly and not trying to time the market which will in turn, enhance your long term gains when the market rebounds.
Dollar cost averaging is a good systematic approach to investing, especially for a new investor. The more experienced Investor might want to be a little more active with their strategy. DCA can work in great with re-balancing your portfolio. For example, use your monthly deposits to top up stocks that have been oversold or need topping up to hit your planned weight targets.
Investment Tracker Weights Table
There’s no doubting depositing a lump sum at the right time can get you better results in the long term but no one has a crystal ball. DCA will get you in the game and you can always keep your asset classes weighted to however you see fit.
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This is not financial advice.