The Advantages of Dollar Cost Averaging
Markets
go up and markets go down. This is completely normal, and is known as market
volatility or risk. The Raiz Philosophy is to invest small amounts regularly,
even in falling markets as this can help you to ride out the downturns in the
market and is one of the keys to having a healthier balance over the long run.
This is the well-known principle of Dollar Cost Averaging. For more information on Raiz fees, click here.
How
does it work? For example, say you have $1,000 to invest. Instead of investing
it all at once, you could invest $100 each month into the market for 10 months,
despite the changes in the market value.
If
for example the stock of choice was priced at $10 the first month, you would
purchase 10 units. If during the second month the stock was priced at $5, you
would purchase 20 units, and so on.
In the end, you would have purchased more
shares when prices were lower and fewer shares when prices were higher. The
outcome is that you may have invested more prudently than simply investing the
money all at once in a lump sum.
Let’s
look at the other key advantages to sticking with Dollar Cost Averaging (DCA):
Avoids
Bad Timing
Investing in one lump sum and trying to pick the best price to enter the stock is known
as market timing, and is something very difficult to do and get right.
If an investor could have any superpower in the world, it would be to pick the low
points of the market. Many have tried, succeeded and failed but no one knows
exactly when the lows and highs will happen, and no one can stop unwanted
surprises from happening.
Dollar Cost Averaging can provide a disciplined strategy as it ensures you are not too exposed to
falls in the market when you buy at the top; and rewarding you when the market
recovers, for buying when the market was falling.
By not depending on the
timing, DCA can smooth out the market’s ups and downs.
Reduces
Risk
Dollar Cost Averaging is most effective in a long term saving strategy. As the market moves up and
down, dollar-cost averaging over time reduces your risks of trying to pick the
best times to invest from these swings.
By viewing falling markets as buying
opportunities, you can significantly enhance your long-term return potential
when the market rebounds.
Removes
Emotional Investing
People often make decisions based on emotion or loss aversion. Loss aversion refers to
an investor’s tendency to strongly prefer avoiding losses to acquiring gains.
Studies suggest that losses are twice as powerful, psychologically, as gains,
leading this type of investment mindset to be more likely to make the mistake
of needlessly selling holdings and switching to cash in a down market.
By
avoiding the media hype or fear in picking the ‘right time’, investors can
avoid both the euphoric and depressive investment traps.
A Dollar Cost Averaging strategy is in line with the Raiz’ philosophy and provides a disciplined
strategy.
“We
don’t have to be smarter than the rest, we have to be more disciplined than the
rest.” – Warren Buffett
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Important Information
The information on this website is general advice only. This means it does not take into account any person’s particular investment objectives, financial situation or investment needs. If you are an investor, you should consult your licensed adviser before acting on any information contained in this article to fully understand the benefits and risk associated with the product.
A Product Disclosure Statement for Raiz Invest and/or Raiz Invest Super are available on the Raiz Invest website and App. A person must read and consider the Product Disclosure Statement in deciding whether, or not, to acquire and continue to hold interests in the product. The risks of investing in this product are fully set out in the Product Disclosure Statement and include the risks that would ordinarily apply to investing.
The information may be based on assumptions or market conditions which change without notice. This could impact the accuracy of the information.
Under no circumstances is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz Invest or Raiz Invest Super.
Past return performance of the Raiz products should not be relied on for making a decision to invest in a Raiz product and is not a good predictor of future performance.
