Wednesday, 15 March 2017

Dollar Cost Averaging a Better Strategy ?

Image result for what

What is Dollar Cost Averaging ?

Strategy in which you invest in a fixed amount of money at a regular basis/ intervals regardless of the market price of an investment .

Image result for dollar cost averaging

The Question is , Not Why but HOW can this strategy BENEFITS you and me as a whole?

Lets take an example here, Let's assume we have two different investors here. One with a lump sum investment and one with a monthly investment of $100 per month for 6 months. 

                                         Investor A                         
                        Price $                          No. of
                                                            Units /

Month 1           5              $600               120                                
Month 2           5                                      
Month 3           2                                      
Month 4           4                                         
Month 5           3                                    
Month 6           5                                        

What we can see here is that , investor A invested $600 with the no of units / shares of 120 at the price or $5

                                      Investor B                         
                        Price $                         No. of
                                                           / Shares

Month 1           5                  $100          20                              
Month 2           5                  $100          20                                    
Month 3           2                  $100          50                     
Month 4           4                  $100          25                   
Month 5           3                  $100          33.33                    
Month 6           5                  $100          20                       
               3.56¹ $600   168.33²

¹[( $5 + $5+$2+$4+$3+$2) divided by 6 months.]
²[ (20+20+50+25+33.33+20) divided by 6 months ]

If you can see , there's two differences in using the Dollar Cost Averaging :

1. The price are lower / cost are lower  , instead of $5 is now $3.56 

2. The no of units / shares are higher , instead of 120 is 168.33.

Image result for benefits

There by using Dollar Cost Averaging its helps us as an investor to create a better opportunity increasing profits and minimizing cost in a longer run. 

Besides  it also helps us to take advantage of the market as we can never time the market. By investing in this strategy we are always in the market whether the market is up or down and hence , we are taking the opportunity each time the market reacts. We all know the beauty of buy low but the fact is how low is low ?

Dollar Cost Averaging also promotes force savings where it creates a good habit for us to set aside our income for investment to add value in our future so that we can achieve our financial goals at a given time frame.

By doing Dollar Cost Averaging , we are less burden in our finances as we could put a comfortable level on our monthly savings / investments instead of a huge amount of lump sum to be saved / invested at a given time. This means , we could save / invest to achieve our financial goals at the same time we do not need to compensate on our lifestyle. That/s a pretty good news for you and me. 

Last but not least,  however this strategy is best to be used for a longer term of investment objectives.

If you have any questions on Dollar Cost Averaging or any other questions on financial goals planning / investment options do not hesitate to leave a comment 

Image result for email

No comments:

Post a Comment