As equity markets continue to decline more and more investors are becoming less optimistic of the markets. Those who believe in buy-and-hold are starting to question their strategy and are afraid of putting in new money into the markets. Given the current situation these feelings are understandable, I notice many new investors asking and looking into Dollar Cost Average strategy, so I thought I shed some light on what Dollar Cost Averaging is and what some benefits are.
Dollar Cost Average (DCA)
In simple terms dollar cost average is an investment strategy where you invest a fixed amount on regular intervals such as weekly, bi-weekly, monthly etc. The amount is usually fixed and often times so is the investment vehicle it could be a mutual fund, index fund, stock or any other investment vehicle.
You could have several DCA plans set-up spreading your regular investments around and diversifying your portfolio.
Why Dollar Cost Average?
The idea with DCA is to invest fresh money without trying to time the market, the unique benefit of DCA is that you will be buying at different times in the market. Since market timing is probably the worst investment strategy and 99% of the time you will get it wrong, through DCA you are able to pick up investments at different prices hence reducing your overall cost and increasing your potential profits.
The trick is to stick with DCA in good and bad times, if you decide to postpone it during bad times it will defeat the purpose of DCA and you will lose out on those gains.
Dollar Cost Average vs Lump sum investment
This brings up the question of is DCA or Lump sum investing a better choice? The answer is, there is no right or wrong answer. Both strategies have their pros and cons, and it depends on many things such as the business cycle, your time and goal and much more. However my preferred strategy is DCA, this strategy generally works out better over the long term than lump sum investing.
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DCA Results
Canadian Capitalist did a review of DCA for the TSX Composite over the past few years.
If you are already committed to DCA I think you should continue to do so, if you are not and are afraid of the markets I suggest you take a closer look at DCA and see if you can set something up.
You can open a Discount broker account and start with small amounts.
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{ 3 comments… read them below or add one }
Ray: There are some great books that teach Investors when to buy and sell what stocks and make gains. You said “since market timing is probably the worst investment strategy and 99% of the time you will get it wrong”, do you not think that market timing or seasonal trading can be a successful strategies?
I think market timing and seasonal trading can be a successful strategy, but I dont consider it really investing its more of a trading and “gambling” strategy. Also dont believe the average investor has enough time, education or resources to time the market.
Nice piece. I think dollar cost investing works well provided the investor who is profiled understands the possible different outcomes that can result from market direction & frequency used compared to lump sum investing. Volatility of the investment instrument used is also a highly contributing factor on the returns derived from this strategy. With a basic understanding of markets, investor should consider actively shifting between lump sum investing & dollar cost averaging throughout their investing horizon.
Mickey
My Informative Article:
Dollar Cost Averaging Explained Here