Dollar Cost Averaging (DCA) is an investment strategy whereby a fixed amount of money is invested periodically over a long period. By doing so, more shares are purchased when prices are low and fewer shares are purchased when prices are high. The aim of this strategy is to lower the total average cost per share of the investment, giving the investor a potentially lower overall cost for the shares purchased over time.
Here’s an example of an effective dollar cost averaging strategy:
The monthly investment of 1000 over a period of one year yielded an approximate return of 17% even though the share price did not really show much improvement on the last month. This is particularly effective if the market is volatile and could be yielding a higher profit compared to a lump sum investment.
Although lump sum investing works better than Dollar Cost Averaging assuming that stock markets continue their long-term uptrend, investors are often paralyzed with fear in times of heightened volatility such that they put off investing. These investors can consider Dollar Cost Averaging in such times to start their investments. By breaking the lump sum into smaller parts, investors can view it as a chance to average down their costs when markets move down. On the other hand, if the markets move up subsequently, investors would have already invested part of their money. The main benefit of Dollar Cost Averaging in times of heightened volatility is that it helps investors overcome the fear of investing in turbulent markets.
This is awesome!!
ReplyDelete