Dollar-Cost Averaging Strategy

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How do you invest? More investors will give one of the three answers. 1) Lump sums 2) Buy the dip as they time their investment alongside the market drop and lastly 3) spread investments evenly over time through a strategy called dollar-cost averaging.

 

Dollar-cost averaging (DCA) is an investment strategy that helps investors lower the capital amount and minimize risk. Instead of buying shares at a single price point, with dollar-cost averaging, investors invest money in equal/similar portions at regular intervals, regardless of the market condition. In other words, investors will still invest regardless of the changes in stock price or other investments. Potentially helping reduce the impact of volatility on the overall purchase DCA also can serve as a risk management trading strategy where investors will buy more when the price is relatively lower and buy less when the price is relatively higher.

 

How Does Work?

1. Implementing the equal investment amount throughout the time.

Let’s plot the scenario into a diagram to illustrate how dollar-cost averaging works. Supposedly, you have $12,000 to invest in your stocks of choice. This is the tricky part, where you are unsure when and at what price you would like to buy the stock. By implementing a dollar-cost averaging strategy, you might decide to invest $2,000 a month for 6 consecutive months. (Note that this example excludes trading costs and assumes fractional shares enabled.)


Let’s take Starbucks Corp’s share as an example. (SBUX:US)

 

Trade Date 

Trade Amount 

Stock Price 

Share Bought

14/01/2022

$2,000

$100.12

19.98

14/02/2022

$2,000

$93.65

21.36

15/03/2022

$2,000

$83.12

24.06

14/04/2022

$2,000

$79.50

25.16

16/05/2022

$2,000

$72.42

27.62

15/06/2022

$2,000

$74.19

26.96

Table show how DCA strategy might play out using varying stock prices.

After utilizing all $12,000 for this trade, you had purchased a total of 145.13 shares for a dollar-cost average stock price of $83. It is in favour of being comparable with buying at an initial price. If you bought $12,000  worth of SBUX in January at a price of $100.12 per share in,  you would own 119.86 shares as compared to having 145.13 shares by doing the DCA strategy. Take into note when the stock increases in value over the long term, you’ll benefit from owning more shares.

 

2. Implementing buying more when the price is relatively lower and buying less when the price is relatively higher.

Let’s take Apple Inc’s share as an example. (AAPL:US)

 

Trade Date 

Trade Amount 

Stock Price 

Share Bought

27/01/2022

$2,000

$159.69

12.52

28/02/2022

$1,000

$65.12

6.06

28/03/2022

$500

$175.60

2.85

26/04/2022

$2,500

$156.80

15.94

27/05/2022

$2,800

$149.64

18.71

28/06/2022

$3,200

$137.44

23.28

Table show how DCA strategy might play out using varying stock prices.

 

After utilizing all $12,000 for this trade, you had purchased a total of 79.37 shares for a dollar-cost average stock price of $151. It is in favour of being comparable with buying at an initial price. If you bought $12,000  worth of AAPL in January at a price of $159.69 per share,  you would own only 75 shares.

 

Why Dollar-Cost Averaging?

  1. Excellent for investor with small investment capital. It helpsting smaller amounts of money into the market regularly. This way,  investor don’t have to wait to saved up large capital to benefit from market growth.

  2. Ensure regular investing even when the market it at slump. Maintaining investment during market dips can be intimidating for certain investors. Thus, the dollar-cost averaging can be a great aid for continuous investment. 

  3. Reduces emotional component – Consistent investment pull out emotional component out from decision making process. Investor who implement DCA tend to continue buying at present price no matter how wild the price swing but rather see it as an opportunity to acquire more shares at a lower cost.

 

Dollar-Cost Averaging Drawback

  1. Market Rises Over Time – The main disadvantage is DCA is excellent during bear market but it a drawback during bull market as the market tend to go up overtime. It means, if the price keep on rising, it is likely to do better if you invest a lump sum earlier, than smaller amounts invested over a period of time. The lump sum will provide a better return over the long run as a result of the market’s rising tendency.

  2. If the stocks chosen turns out to be a bad pick, the investor will only be investing steadily into a losing investment.

 

Conclusion

 

For beginner investor who are lack of knowledge or time to do constant research and not exposed to wild market swing, dollar-cost averaging might be a good approach. According to Charles Schwab research, ‘Those who remain invested during bear markets, for instance, historically have seen better returns than those who withdraw their money and then try to time a market return’. 

 

 

None of the material above or on our website is to be construed as a solicitation, recommendation or offer to buy or sell any security, financial product or instrument. Investors should carefully consider if the security and/or product is suitable for them in view of their entire investment portfolio. All investing involves risks, including the possible loss of money invested, and past performance does not guarantee future performance.

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