Is Dollar Cost Averaging a Sound Investment Strategy?

Dollar-cost averaging is a strategy in which a person invests a fixed dollar amount on a regular basis, usually monthly purchase of shares in a mutual fund. When the fund’s price declines, the investor receives slightly more shares for the fixed investment amount, and slightly fewer when the share price is up. It turns out that this strategy results in lowering the average cost slightly, assuming the fund fluctuates up and down

dollarcost1.jpgDollar-cost averaging is carried out simply by investing a fixed dollar amount into your mutual fund (or other investment instrument) at pre-determined intervals. The amount of money invested at each interval remains the same over time, but the number of shares purchased varies based on the market value of the shares.

When the markets are up, you buy fewer shares per dollar invested due to the higher cost per share. When the markets are down, the situation is reversed and you purchase a greater of number of shares per dollar invested. It’s a strategic way to invest because you buy more shares when the cost is low, so you get an average cost per share over time, meaning you don’t have to invest the time and effort to monitor market movements and strategically time your investments.

Dollar-cost averaging – the basic premise behind employer-sponsored savings plans like is the practice of investing a set amount each month in a particular investment vehicle. As the share price of your investment fluctuates, so will the number of shares your set amount buys. Sometimes you’ll pay more and sometimes the stock or mutual fund will decrease in value, allowing you to purchase additional shares.

With the vast and varied information available on investing, many have chosen to stop chasing yesterday’s high returns. Using dollar-cost averaging helps them ride out the ups and downs of the market.

Dollar cost averaging involves continuous investment in securities, regardless of fluctuating price levels. Investors should consider their ability to continue purchases through periods of low price levels r chancing economic conditions. Dollar cost average does not assure a profit and does not protect against a loss in a declining market.

Dollar-cost averaging isn’t for everyone. Short-term investors and those concerned about market volatility won’t benefit from the slow and steady pace of dollar-cost averaging. Always meet with a financial professional before investing. For those who want to invest a consistent amount each month and potentially lessen the effects of market volatility, it might be an option.

The main conclusion I can draw that one should not delay investing. If you want to invest, say, $100 in a mutual fund in a year, you should start invest immediately. If you have $1,200 spare money to invest on the first work day of January, split it to quarterly or monthly, as the markets could be on a high on 1st January and you are stuck with the same purchase price. It also helps make investing easier to budget, as the same dollar amount will be purchased at regular, predictable intervals.

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5 Responses

  1. Jag says:

    Hi Robin,

    Interesting post. Personally, I’m not really a subscriber of dollar cost averaging.

    What I do, is that I put in a certain amount of money in first to test the water. If it goes up further by a certain %, I will put in more, till it reaches the money I set aside for that particular investment. I usually got at 50% of the budget and then the next 50%. Or alternatively, 30%, 30% and 40%.

    Sometimes, if I feel confident, especially those that I feel are at a great discount to intrinsic value which are poised to make a comeback soon, I will just dumped everything in, with a stop loss in place to guard against any risk. In that way, I get maximum amount of profit potential, as compared to splitting up the investment and going in by by bit.

    Still, we have to be careful when it comes to averaging down though. We might be catching a falling knife, and getting deeper into the mire. Tricky situation therefore it pays to do some due diligence first.

    Cheers,
    Jag

  2. Robin Bal says:

    Hey Jag,

    Good comment mate. As I have mentioned that dollar cost averaging is not for everyone. I liked your strategy of splitting your budget for an investment.

    If my budget for a stock is 100$ I jump in with the whole lot, with my stop loss and book profit margins.

    Thanks for your comment, take care and Cheers.

  3. Greg R says:

    Hi Robin:

    Yes, DCA is an excellent strategy for many investors because it requires a disciplined and consistent approach to investing, and this discipline and consistency is probably more important to investment success than any individual asset choice. And the fact is, most investors have no choice but to DCA over the course of an investment lifetime, except in cases where there is an inheritance, 401(k rollover, and so on.
    However, since at least 1978, there has been solid academic research indicating that DCA does not beat lump sum investing. More recently there has been research showing that a more aggressive form of DCA, value averaging, will beat DCA by small margins.
    You can see my post on justforfunds.blogspot.com, Research Indicates Lump Sum Investing Beats Dollar-Cost Averaging, for details.
    Keep up the good work!

  4. Greg R says:

    Hi Robin:
    This is the proper URL for the justforfunds.blogspot.com post I mentioned earlier: Research Indicates Lump Sum Investing Beats Dollar Cost Averaging.
    My apology.

    Greg R

  5. Robin Bal says:

    Hi Greg,

    Thanks for your comment Greg.

    I read your post “Research Indicates Lump Sum Investing Beats Dollar Cost Averaging”. DCA is an excellent strategy but not for all and if you have a longer time horizon its good to have a more aggressive approach in your DCA portfolio.

    Lump sum investment beats DCA, but then again it all depends on the timing of your lump sum investment, as you will be stuck with the same purchase price. Both strategies have their own pros and cons. I will be checking your site again, you have informative stuff there.

    Take care and Cheers.

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