Cost averaging

by Admin
Updated: November 4, 2018

Cost averaging is a simple investment strategy for reducing risk in a volatile market.

Getting started with an investment portfolio can be daunting. General research into which markets can be expected to grow over the long term may not be too challenging but actually taking the plunge and buying in to three or four specific funds or stocks can be a source of great stress which is made even worse if the price drops the very next day.

Assuming a rising market (usually a long term view), a sensible and less stressful approach is to invest a fixed amount on a regular basis.

Periodic fixed amount

The benefit of investing a fixed amount periodically is to smooth out the effect of price fluctuations: More shares will be acquired when the price is low than when it is high.

Frequency and timing

It is always important to look at the historical data (charts) before committing to a schedule. Some (many) markets have underlying behaviors that even an inexperienced investor can exploit

For example, it’s possible to gain small but significant advantages from noticing that sell-offs - which lower the price slightly - happen on Fridays or the last business day of the month.

Monitoring

Beginner investors are generally advised not to monitor their scheduled investments too closely. The reason given is to avoid the temptation to buy more when prices seem substantially lower or suspend buying if higher prices seem to be a blip.

I disagree with this idea because I believe it’s not only important to always know what’s happening to your investments but it’s also how you learn to get a feel for the markets. Moreover, a person who can’t stay committed to their strategies probably shouldn’t be actively investing in the first place.

Regular investment accounts

There are many regular saver cost averaging share builder accounts available. Some are even offered by banks as an easy investment account option. There are often incentives and most such plans are limited to less risky stocks.

More info

“Dollar-Cost Averaging (DCA)” at investopedia.com.

“Dollar-Cost Averaging: How It Works and When to Use It” at nerdwallet.com mentions the extra sweetness of dividends.

“Does Dollar Cost Averaging Work?” at moneychimp.com has a very nice calculator.

Internal links

Investing in funds is dumb Charting for fun and profit Support and resistance Go to Articles
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