The Truth about Dollar Cost Averaging (DCA)

The Truth about Dollar Cost Averaging (DCA)

dollar-cost-averagingDollar Cost Averaging (DCA) is an investment strategy that utilises the law of averages. Many consider DCA to be a disciplined strategy that can remove emotions and fear that often affect investors, especially in the short-term.

The following is an excerpt of a post by user WellHandy, that serves to demystify the strategy by showing both pros & cons, and explain it in such simple terms which allows investors to understand it easily:

“From a simple google search for definition of Dollar Cost Averaging, yields:

Dollar-cost averaging (DCA) is an investment technique of buying a fixed dollar amount
of a particular investment on a regular schedule, regardless of the share price.
The investor purchases more shares when prices are low and fewer shares when prices are high.

I would like to further refine that to:

Dollar-cost averaging (DCA) is an investment philosophy of buying a fixed dollar
amount of a particular investment on a regular schedule, regardless of the price.
The investor purchases more quantity of investment when prices are low and fewer
quantity of investment when prices are high.

***Support for #DCA***

Most proponents of #DCA puts forward that with fixed amount, there is reduced price
impact. Meaning you pay lesser for the investment overall, assuming the market prices
are in a U shape.

A more numerical example as follows:

Others say that since we can’t predict the market cycles, it instills discipline and holds
more cash at higher prices and reinforces buying conviction at lower prices.”

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