THE BENEFITS OF DOLLAR-COST AVERAGING
Dollar-cost averaging is simply investing a fixed amount on a regular basis, say monthly, no matter what the market conditions are.
The number of shares purchased each month will vary depending on the share price of the investment at the time of the purchase. When the share value rises, your money will buy fewer shares per dollar invested. When the share price is down, your money will get you more shares.
Over time, the average cost per share you spend may compare quite favourably with the price you would have paid if funds had been invested at one time.
The other important benefit of dollar-cost averaging is psychological, not financial. For those who are risk-averse or new to investing, this is an excellent opportunity to ease into the market. Investing small amounts regularly versus a large lump sum allows the investor to get comfortable with normal market fluctuations.
To summarise, the key advantages of dollar-cost-averaging are:
- Investors reduce the short-term risks associated with a market volatility, especially relevant in turbulent times like those we find ourselves in today.
- By investing the same amount every month, investors automatically buy more shares when the market is down and fewer when the market is up. This averages down the total acquisition price for the shares over time.
- Peace of mind for the investor.