How it works.
Dollar-cost averaging, in the US, or as it is generally known “unit cost averaging,” “incremental trading,” or the “cost average effect,” is an investment strategy that aims to reduce the impact of volatility in the financial markets by separating the investment capital into smaller sums and having them invested periodically into a given instrument, instead of all at once.
A prerequisite with this strategy is that the above mentioned smaller sums of investment capital will be separated into equal parts and will be invested into periodically into fixed time intervals and on one predetermined financial instrument.
- Easy to implement.
- “Set and forget” investment strategy.
- Suitable for passive and beginner investors.
- Minimizes the sort term price fluctuation.
- Smaller investment capital required.
- This strategy doesn’t work for stocks that move sideways for many years.
- This strategy assumes that the investor doesn’t know how to value an asset.
- Although this strategy eliminates the sort term price fluctuation, it does not help on a stock at a downward trend.
- Psychology plays a huge role. It is difficult for many investors to invest in a company constantly when the price is on a temporary downward move.
Jack Bogle on DCA strategy.
The opposite “lump sum” investment strategy.
Unlike the DCA strategy, the lump sum strategy requires the full amount to be invested all at once on a financial instrument.
You must be aware of the risks and be willing to accept them in order to invest in these markets. Don’t trade with money you can’t afford to lose. The information contained in this article is for educational purposes only and is not to be a recommendation for any specific investment. Trading any market carries a high level of risk, and may not be suitable for all investors.