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
