Dollar Cost Averaging: Investors’ Perspective

In this article, we shall look at what exactly is Dollar Cost Averaging. This will be looked at in the perspective of an investor (i.e. persons whose investment horizon is more than 12 months). For traders out there, hang on yeah. I will write about dollar cost averaging for traders pretty soon.

Dollar Cost Averaging is a technique used by many investors out there to multiply the returns from their investment.

It can be implemented with different types of investment products. For example stocks, bonds, and mutual funds/unit trust funds.

What is it really?

Dollar cost averaging is an act of adding up or topping up your investment regularly over a period of time, regardless of market performance and conditions. For example, you invest in a unit trust fund, and every month, you chip in RM1,000. This regular additions are made while disregarding what’s happening in the market, be it whether the market is skyrocketing or trending downwards.

Why do we do this?

1. It allows you to chip in small amounts of money each time.

2. It can be set automatically through Standing Instructions. In other words, your investment effort is set on auto-pilot.

3. Due to the fact that nobody can predict when a stock market actually bottoms and tops, dollar cost averaging can potentially sets you up to perform better in the long run.

4. In a way, it lowers your break even point. During downturn periods, you are able to accumulate more units of investments. Also, by implementing dollar cost averaging, your cost per unit of investment can actually be lower than the average price of the investment itself.

Does it work?

Well, assuming that at the end of the day, the investment product ends up in the high (i.e. it ends up much much higher than what you paid for), then it’ll work.

However, there is always the possibility that the investments will not increase in value at all. The value of the investment product might end up being lower than what you actually paid for, and now you’re stuck with a dud investment. You might be in the position of throwing your money into an investment that goes down… and KEEPS GOING DOWN.

So, usually, it is best to stick with top quality investments. It also helps if you diversify further by choosing a few investment products (e.g. invest in more than one unit trust fund?)

We will look at an example of Dollar Cost Averaging in action, in the next article. So, stay tuned!

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Disclaimer: This article is not a specific nor general advice on managing or investing your money. This article does not constitute a recommendation nor does it take into account your investment objectives, financial situation nor particular needs.

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Other related posts:

Risk Tolerance Level
Risk Tolerance Level: Part 2
Back to Basics: Recovering from Negative Returns
Types of Mutual Funds (Unit Trusts)
Understanding Unit Trust
Fund’s Strong Performance

About nadlique

This blog is about the journey of a 28-year-old Malaysian towards financial freedom. This blog was started back when the blogger was 21 years old. However, his journey towards financial freedom had begun way before that. Materials such as investing, business, entrepreneurship, equities, and real estate are presented. The author also posts his thoughts and observations on life in general.

Comments

  1. Hi Nad,

    Dollar Cost averaging actually really works to maximize your investments. For me, I do not have a big sum of money to dump in as lump sum in my unit trust fund.. So I do it regularly (monthly). Dollar cost averaging is actually buying more units when the price is cheap and lesser when the unit price shots up. at the end of the day, you can actually see the difference of the total amount of investment and the value of the investment you get in return. Will show you real investment chart
    based on my rvery own investment I just started in march this year..

  2. That’s still with the assumption that the value of the investment ends up higher at the end of the investment period.

    If it ends up lower than the break-even point, then the investor loses.

  3. salam…
    honestly, it’s quite embarassing for me to ask u bout this coz i’m not a person who’s knowledgable abt the financial biz..however, i’m wondering…for a student like me, surviving on allowance, which d u think is better for me? public mutual or asnb? i really feel that i need to do something for my future, so i hope u can offer some advice…
    thanks nadlique..hope to receive a reply from u…thnk u

  4. W’salam Fara! 🙂

    To be honest, it’s not really about where you source your money to invest. It’s more of your risk profile. To determine which investment products is for you is to determine your investment risk tolerance. Are you a low-risk investor? Are you an medium-risk investor or are you an aggressive investor.

    ASB is generally known to be a low-risk investment product. At the same time, it gives you low returns.

    For ASN, I’m not too sure.I think it’s for medium risk investors?

    Unit Trust (Public Mutual, CIMB, and etc.), they offer a wide range of products for low-risk investor up to aggressive investor.

    So, what you need to do now is think about how much risk you are willing to tolerate. Just remember that with higher risk investment products, you stand the chance to see your investment losing in value before actually recovering and move into profit. Just look at my Public Mutual investment. I bought my unit trusts around 5 months ago and up until now, I’ve lost about 15%. I might be fine with that but there are people out there who are not.

    Hope that helps. I’m sorry I can’t offer you much more specific advice. Do ask more questions if need be 🙂

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