Dollar cost averaging explained - Bridges Financial Services

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Dollar cost averaging is simply the term used to describe the strategy of making regular incremental investments over a period of time as opposed to a ... Menu Menu Howwecanhelp Helpatanystage Creatingandbuilding Managingandmaximising Enjoyingandtransferring TheBridgesdifference Financialadvicemakesadifference Selectingafinancialplanner Whattoexpect PartneringwiththeSmithFamily AboutBridges Makeanappointment Findoutmore Clientstories Onlinevideos Calculators Superannuation Superannuation Superexplained Howmuchsuperisenough? Contributingmoretosuper DIYsuper Howwecanhelp Whatyoucandonow Superstrategies Makeanappointment Findoutmore Gettingtoknowyoursupervideo Self-managedsuperfundsvideo Contributingtosuperguide Investing Investing Savingandinvesting Investingexplained Whychooseamanagedfund? Howwecanhelp Investmentadvice WhyBridges? 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Retirementplanning Howwecanhelp Transitiontoretirementstrategies Aregularincomeinretirement Retirementadvice Makeanappointment Findoutmore ((Retirementlifestylecalculator)) Transitiontoretirement Retirementincomeoptions JohnhelpsFrankandKaywiththeirinvestmentsandretirementincome Estateplanning Estateplanning Estateplanningexplained EstablishingavalidWill Developinganestateplan Howwecanhelp Estateplanningadvice Makeanappointment Findoutmore Whathappenstoyoursuperwhenyoudie Estateplanning RameshhelpsWarrenwithhisretirementplanning Agedcare Agedcare Agedcareexplained Fiveagedcaresteps Typesoffees Howwecanhelp Makeanappointment Agedcareadvice Yourfirstappointment Findoutmore Agedcare–makinganinformeddecision Clientstories Onlinevideos   Login News Calculators ReceiveBridgesInsights Educationandtools Howwecanhelp Superannuation Investing Personalinsurance Stockbroking Retirement Estateplanning Agedcare Home PDFflyers Edflyers Investingflyers Dollarcostaveragingexplained PDFthispage Dollarcostaveragingexplained 1July2021(updatedannually)Dollarcostaveragingissimplythetermusedtodescribethestrategyofmakingregularincrementalinvestmentsoveraperiodoftimeasopposedtoaone-offlumpsuminvestment.Thetheorybehindthisstrategyisthatyoucanreducethemarkettimingriskofinvestingyourentireportfolioinasingletransactiononwhatmightbeanexpensiveentrypoint.Inotherwords,ifyouinvestalumpsumonadaywhenthemarketisupyouwillpurchasealowernumberofunitscomparedtoadaywhenthemarketislower.Byadoptingadollarcostaveragingstrategyyoucanspreadoutyourinvestmententrypointsandpotentiallyachievealoweraveragecostbase,whichmeansyoupurchaseagreaternumberofunitsforthesame(investment)amount.Dollarcostaveragingismosteffectivewhenmarketsareonadownwardtrend.Inarising,orbull,marketenvironment,adollarcostaveragingstrategyisnotaseffective;obviouslythelumpsuminvestmentwouldbeoptimalonthedaywhenthepricewaslowest–thefundamentalprincipleofbuylow,sellhigh…buthowdoyouknowwhenthatdayis?Effectively,allworkingAustralianspracticeadollarcostaveragingstrategywithintheirsuperannuationaccounts.Formostofus,eachmonth,ouremployersmakecontributionsforoutbenefittosuperannuation.Thedecisiontoactivelychoosetoimplementadollarcostaveragingstrategyarisesforinvestorswhoneedtorestructureinvestmentstomanageanewstageoflifeorperhapsduetoanabnormalreceiptoffundssuchasaninheritance.Thesuccessofadollarcostaveragingstrategywilldependuponthefuturereturnsfromtheinvestment.CasestudyLet'slookatasimpleexampleofdollarcostaveraginginaction.Thetablebelowshowshowsomeonewhoinvests$200every monthforfivemonthswillpaydifferentamountsforeachunitasthemarketpricechanges.Overthewholeperiodoffivemonthsthe averagecostperunitwas$7.37sonotthelowestorthehighestpricethattheunitscostduringthattime.Dollarcostaveraginghelps reducetheriskthatthetimingofapurchasecoincideswiththepricebeingparticularlyhigh.Thetablealsoshowsthebestandworst casesachievedifthetotalpurchasewasmadeallatonetimeinsteadofbeingspreadout:MonthInvestment($)Unitprice($)UnitspurchasedMonth12005.0040Month22006.6730Month320010.0020Month42006.6730Month52008.5024     Averagepurchaseprice=6.94144     Dollar costaveragingstrategyTotalcostofinvestment$1,000.00  Valueatendofperiod$1,224.00  Profit$224.00     Worsttimingofpurchase (Month3)Totalcostofinvestment$1,000.00  Units@month3100  Valueatendofperiod$850.00  Loss-(150.00)     Besttimingofpurchase (Month1)Totalcostofinvestment$1,000.00  Units@month1200  Valueatendofperiod$1700.00  Profit$700.00UnitPricingExampleInsummary,adollarcostaveragingstrategycanbeaneffectivewaytoinvestoverthelongterm,however,therearemarketenvironmentswhichwouldbettersuitlumpsuminvesting.Foralongterminvestor,thedecisionshouldbeabouttimeinthemarketnottimingthemarket.Perhapsthedecisiontoinvestalumpsumoveralongerperiodoftimeshould bebasedonyourappetiteforrisk.Ifyoucantolerateshorttermpricevolatilityinfavouroflongertermgains,youmay considermakinglumpsuminvestmentsduringlowentrypoints.Manyinvestors,however,remaincautiousonshortterm pricevolatilityregardlessofthelongterminvestmenthorizonandgainmorecomfortfromslowlydeployingfundsintothe markettoaverageouttheentrypoint.Thesecrettosuccessfulinvestingistimeinthemarket,ratherthantimingthemarket. 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