Dollar Cost Averaging
Strategy for Investing in the Stockmarket

The dollar cost averaging strategy works on the principle that you invest sums of money on a regular basis into share market-related funds, or directly into one or more shares – say $A1,000 each month or two, or whatever.

The idea is that when the share price is high, the regular amount buys fewer shares and when the share price happens to be low, the regular amount buys more shares.

Since you are buying more shares at lower prices and fewer shares at higher prices, you are effectively averaging down the overall price of the shares.

This stock market investing strategy is intended to reduce exposure to risk associated with making a single large purchase, assuming you want to guard against the market losing value shortly after making your investment.

Therefore, you spread your investment over a number of periods rather than timing stock market investment.

While research has shown that investing a partial sum over a number of time intervals generally results in worse performance as compared to investing the entire sum at one time, you can expect less variability (up and down) in outcome by implementing this stock market investment strategy.

Hence, the strategy can help to limit the downside of a worst-case scenario of an immediate drop in asset value after the lump sum is invested.

Why do I avoid this strategy for stock investing?

I prefer to be more patient, hold on to my money, and buy the shares when they offer good value.

Then I expect to be much better off as I am timing stock market investments.

In your case, it will depend to some extent on how risk averse you are in terms of handling stock market volatility.

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