Last updated: 26 May 24 22:11:34 (UTC)

What is Dollar Cost Averaging?

By Michael Paulding Thomas


“Dollar-cost averaging is almost real-time re-balancing.”Nick Murray

DCA is an investment strategy designed to reduce volatility in which mutual fund shares are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving. Thus, as prices of securities rise, fewer units are bought, and as prices fall, more units are bought.

Instead of investing assets in a lump sum, the investor works his way into a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over several years.

DCA has been called the “dumb man’s revenge” because over the long-term it can outperform “market timing” and sporadic deposits.



“This is a testimony to the genius of dollar-cost averaging, which all long-term accumulators practice because we have no choice: we’re investing what we can save from what we earn, and this process is ongoing. Investing over time into a meaningfully diversified equity portfolio, aided by annual re-balancing, inevitably loads up on the laggards and eschews what’s hot, thereby insuring that we outperform not just the markets but our own investments.”Nick Murray

"The best time to invest in equities is whenever you have the money. It is the patient, disciplined equity accumulator — looking neither to the left at economic events nor to the right at market gyrations — who achieves his/her lifetime goals. This exquisitely rare accomplishment is never intellectual, but always temperamental.

Thus, if I suddenly came into a million after-tax dollars one day, it would all be invested in equities by nightfall. Never having experienced such a day, but instead having spent a career investing my net earnings, I have always been, however haphazardly, dollar cost averaging. That is to say: whenever I had money to invest, and the equity market was terrible, I all unwittingly acquired barrels full of panic-priced shares. And when I had investable sums in soaring markets, I (equally unconsciously) bought thimbleful of relatively overpriced shares.Nick Murray




Benefits of DCA

  • It’s Smart. Buying more units when prices are low and fewer units when prices are high is a good way to reduce the average cost per unit.

  • It’s Automatic. With an Electronic Fund Transfer deposits occur systematically from your checking account into your mutual fund. You can do so for as little as $50/month.

  • It’s Disciplined. Dollar cost averaging takes the emotion out of investing. You can stop asking yourself, “When’s the right time to buy?” It eliminates the issue of market timing. As a result, an investor’s returns will be determined more by the overall trend in a given fund as opposed to the investor’s specific entry price. In addition, it helps investors reduce their cost basis on securities that decline in value.






A brief compilation of excellent investment advice from the best of the best.

,

Top

Securities offered through Innovation Partners, LLC. Member FINRA/SIPC