What Is Dollar Cost Averaging?
By Sandy Naidu | July 20, 2008
We all know that every market has its ups and downs. If only we could all invest at market lows and reap the benefits when the markets go up… The reality though is that it is not easy to ‘time’ the market..This is where ‘Dollar Cost Averaging’ comes into play.
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Dollar Cost Averaging simply means - rather than investing a lumpsum, you make smaller periodic investments. If you had invested a lumpsum, you are basically investing into that investment at a particular price (and this price could be a high, low or somewhere in between). But if you were to make smaller periodic investments, you can smooth out the market’s ups and downs (volatility) and this will help reduce the risk of loss. |
Most of us make use of ‘dollar cost averaging’ without even realising that we are. Were you aware that when you actually open a savings plan, you are making use of ‘dollar cost averaging’?
There is however one important thing you need to keep in mind when you opt for smaller periodic investments - and that is ‘fees’. Make sure you understand what your entry and brokerage fees are every time you make an investment. You don’t want to be spending substantial amounts on this - if you do then you end up turning ‘dollar cost averaging’ against you. This mechanism usually works well for mutual funds and might not work that well for shares (because of the brokerage costs).
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Topics: Financial Definitions, Managed Funds |
One Response to “What Is Dollar Cost Averaging?”
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September 1st, 2009 at 9:55 am
Dollar cost averaging is an investing method that takes advantage of changes in market price over long periods of time. Investors do this by investing a set amount of money, rather than purchasing a certain number of shares, ensuring that their investment buys more shares when prices fall. Dollar cost averaging is usually done over long periods of time time, particularly with long-term investments to which a person plans to contribute regularly. This helps investors ensure that they pay a mix of higher and lower prices for the investment, rather than taking the risk that a particular day’s price might be high or low. By investing a set amount over time, investors help take advantage of the rise and fall of prices in the market. However, investors can also use the same method to invest a substantial deposit, breaking it up into multiple smaller deposits over a certain period.