What is Dollar Cost Averaging?
The investment strategy commonly referred to as ‘dollar costaveraging’ is a regular savings plan into shares or managed funds. This strategy is generally utilised to manage risk i.e. buying a small parcel of shares or units often, rather than a lump sum in a day. There is a risk that if you buy them all on one day, the price might be high at that time.
How does it work?
- If you buy shares through a trading account, you can choose how many you buy if it amounts to whole shares/units.
- Some managed funds will allow a regular invest plan with as little as $1,000 to begin. The regular amount starts from around $250 per month.
- Regular investing through a platform such as a wrap account or managed discretionary account, will also allow for an automated set up to make regular investments.
What are the benefits?
- You can start your wealth creation strategy without a large initial lump sum to invest.
- Dollar cost averaging is generally most effective in a volatile market and provides smoothing of the entry price into the investment.
- The risk of investing a lump sum at a high price is reduced by the averaging of entry prices from regular investment. This reduces the cost of your portfolio, leaving more upside for investment returns!
What should I be thinking about?
- Dollar cost averaging does not eliminate all market and investment risk. Your portfolio returns will still be subject to market volatility and investment performance.
- Starting with a lower investment means that it will take longer to build an investment portfolio where further diversification can reduce some market or sector risk.
- You don't get to "pick" the market. The timing of purchases is often pre-set and therefore automated.