What Is Dollar-Costing Averaging?

If you're worried about timing the market when adding a large lump sum to your investment portfolio, especially during volatile periods, dollar-cost averaging (DCA) offers a simple and effective solution.

A must-watch if you're sitting on cash and worried about when to invest!

Transcript of above:

If you're fortunate enough to be putting money into your portfolio, but you're worried about mis-timing the investment, particularly if it's a larger amount or, and when I say larger we sort of define that as maybe 10% or more of your account size. So if you've got a $100,000 account and you're putting in more than $10,000, you may want to consider drip feeding it, or one program is what we call the dollar-cost averaging.

This is a systematic or automated way of investing. In this example, we're talking about basically a set amount of money over a regular period - and it just goes on autopilot. And so in this example, if you had $12,000, you could do $1000 every month - maybe the 1st of the month or the 15th. I think the important thing is to set it up and then not change it and to stick with the plan.

Why Is It Important?

Particularly when again we are seeing more volatility in stocks - it reduces the uncertainty and the stress of having to make a decision, ie Do I buy now? Do I wait? Is it going to go lower? Is it going to go higher? which is really a market timing exercise and quite fruitless.

So, it takes that pressure away from having to decide, and it also smooths out the market ups and downs. You know, you're less likely to miss-time it, so to speak, if you spread those investments out over a period. So very useful for times like now, when there is market volatility or as I said, you've got a large lump and you don't want to take that bet all at once. Again it reduces the risk of poor timing and a great way to build wealth overtime.

A classic example is if, you may not be aware of this, if you are contributing to super either voluntarily through something like salary sacrifice which is a periodic deduction from your payroll, likewise your employer contributions - same thing. So whether you realise it or not, that's actually happening in your plan in your super right now.

So this isn't a perfect solution. If we had a crystal ball and we knew the market was going to be higher in 12 months, or whenever in the future, we would do that now, ie we'd invest it all now. So it doesn't work perfectly, but the idea is to keep you invested to keep you sticking to the plan, and in our experience this is a great way to do it for the scenarios.

We talked about the one time it wouldn't work is if the market went higher and you could have bought them now, but it's in our view it's not a purely a financial thing, it's also an emotional thing that you're feeling, like it's a less stressful journey for you.

That's a way to add money to your portfolio, in a systematic approach that doesn't require you're trying to guess what the market's doing all the time. 

Thanks for watching!

Simon

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