By Jessica Wee
This is an investment strategy suitable for beginners, emotional, indisciplined, busy bees, lazy and/or lower risk tolerance investors. Dollar Cost Averaging (DCA) means your purchases/investments occur regardless of the asset’s price and at regular intervals.
You may apply Dollar Cost Averaging to your investments in stock market, unit trust/mutual funds, crypto, robo advisors, commodities, etc.
There will always be friends/family telling you the smart thing to do is to only buy when the market has crashed. Truth be told, it is impossible to time the market or predict future market decline/rise (no one has a crystal ball!).
Timing the market also means you will be investing in a lump sum, that feels very much like a casino Baccarat game to me… i.e. all or nothing!
Dollar Cost Averaging helps you lower the amount you pay for investments and minimize risk.
Therefore, let us consider the advantages of DCA:
1. COMPOUNDING INTEREST – Once you have started to build the size of your investment with the help of DCA, the concept of compound interest gives you a boost. Compounded interest is the interest you earn on the sum of both your initial investment and the interest that investment already has earned. In short, it is interest on interest!
2. DISCIPLINED approach – you set aside x amount monthly/ quarterly and invest into the stock/fund you have set your eyes on. For some investments eg: via robo advisors, they allow investors to set a ‘standing order’ in ensuring X amount is debited from your bank account on schedule.
3. BE A LAZY INVESTOR – invest and go to sleep (for awhile). This approach lets you reduce the emotional component of investing and avoid bad timing of purchases.
4. REDUCE investment RISK – that fixed amount buys more shares/funds in times when the market has dropped and prices are low, and it limits the amount of shares when the market has risen and prices are high. Over time you will come out ahead, compared with trying to time the market.
DCA is not suitable if:
- You have a LARGE SUM to invest.
- You are investing in unit trust/mutual funds that have HIGH INITIAL INVESTMENT.
- You enjoy trying to TIME THE MARKET, time is not of the essence and you are diligent in your research.
- You plan to invest for the SHORT TERM or intraday trade.
When you view investment as long-term commitment, Dollar Cost Averaging keeps you in the market and makes you buy shares even when the market is down.
It takes the emotion out of purchasing decisions, especially in down markets, it helps you position yourself and your investments for success over years and decades.