If you have ever considered investing, chances are you have heard about dollar cost averaging (DCA investing). There are so many investment strategies to choose from, it can be difficult to know which one is the most beneficial or suitable for your situation.
To help you decide, let’s take a more in depth look at one investment option: dollar cost averaging.
In this article we will cover:
- What is dollar cost averaging?
- Is dollar cost averaging a good investment strategy?
- Pros and cons of dollar cost averaging
What Is Dollar Cost Averaging?
Dollar cost averaging is defined as:
“An investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase.” Investopedia
Or to put it more simply, you divide the total sum to be invested and consistently invest the same amount in the same asset over a period of time, up to the total investment amount. This strategy prevents emotional investing based on peaks and troughs in the market by taking a slower and steadier approach.
Over the period you’re investing, you should save money on entry costs, allowing you to enter the market below the prevailing marketplace prices. Over time, this means you could end up with more shares in your portfolio for less expense.
Is Dollar Cost Averaging A Good Investment Strategy?
There are two schools of thought on this: some believe dollar cost averaging to be an intelligent approach to investing, but it can depend on the current state of the market. It sounds like the smarter choice to buy shares at any time, even during a dip in the market when other investors are put off; however, lump sum investments do still tend to offer better returns over time.
This doesn’t discount dollar cost averaging as a smart investment choice; what it does mean is that you need to weigh up the pros and cons carefully. As is always our advice, you will also need to assess your current financial situation and market trends before committing to a single investment.
Pros And cons Of Dollar Cost Averaging
As with every choice, investment or otherwise, there are pros and cons to consider. Dollar cost averaging is no different. Consider the following points:
- No emotional investing, just sure and steady investing on a preset course regardless of how volatile the market is.
- Lower risk, investing incrementally over time means no sudden losses of a lump sum investment.
- It can be a safer, easier strategy for those who are not well versed or comfortable with investing.
- Steadily buying, even during dips in the market, can mean you amass a good size portfolio at a lower market price.
- Higher risk, lump sum investments do tend to offer better returns over the long run than the dollar cost average.
- Committing to a single investment and continuing to steadily invest without review could mean you make a greater loss if it is a losing investment.
- Doesn’t allow you to jump on changes in the investment environment such as a large company acquisition that adds value or a new company joining the share market.
Is Dollar Cost Averaging Right for You?
If you are a seasoned investor, dollar cost averaging is likely not the best option for growing your wealth and investment portfolio. In this instance you could be better served using market swings and changes to your advantage, building a more dynamic portfolio in the process.
If, however, you’re attempting your first foray into the market, this is a great, lower-risk way to learn. You can also stop and review at any stage and reconsider your investment strategy – nothing is set in stone. Finding a reliable dollar cost averaging calculator could also help you decide if this strategy will help you attain your financial investment goal.
How Can I Help You Grow Your Wealth with Dollar Cost Averaging
At Collins Mann, we can help you learn how to invest in shares and choose an investment strategy that best suits your financial goals. We are committed to helping you live a life of choice and not compromise.
Call us today on (07) 3251 3200 and book an appointment to learn how we can secure your financial future. Whether you want to pursue DCA investing or a higher risk model, our experienced team of financial advisors can assist.