What is Dollar-Cost Averaging?

Investing isn’t easy – even for veteran investors. Sometimes we mistime the market or withdraw too early.  

Dollar-cost averaging (DCA) helps investors deal with market ups and downs by making consistent investments regularly. This way, they avoid making emotional investing decisions and remain invested at all times.  

What is Dollar-Cost Averaging (DCA)?

DCA is a strategy where you invest the same amount into the same stock or fund regularly – whether weekly or monthly. 

For example, Adam invests in Stock A. Every  month, he purchases RM200  worth of shares from Stock A – regardless of the market’s performance and the share’s price. 

Why practise dollar-cost averaging?

1. It takes the emotion out of investing

It’s no secret that markets are unpredictable.

When your investments inevitably make a loss, a gut reaction would be to withdraw completely or switch to a lower risk fund. 

However, the stock market tends to trend upward in the long-run. It’s very likely that it’s a short-term loss. One of the earliest examples is S&P 500.

Source: Google Finance as of 20/10/2022

That’s not all; when markets dip, you buy stocks at a discount. This will lead to long term gains when share prices go up again. 

Committing to DCA creates a habit of consistent buying – regardless of the market performance. It provides psychological comfort to investors and prevents them from ruining their portfolio returns. 

2. Your money is invested at all times

Investing is a long term commitment; the sooner you enter the market, the better. DCA lets you maximise your time in the market, where you can ride out short-term losses and set yourself up for long-term gains. 

By investing regularly in up and down markets, you lower the average cost per share as you buy more shares at lower prices and fewer shares at higher prices. 

3. Anyone can do it

Timing the market is difficult and almost impossible. DCA works for investors who cannot dedicate research and hours into timing the market. This strategy is also for the Everyday Investor who cannot afford to invest in a lump sum. This way, they stay invested in the market with more peace of mind. 

4. Suitable for volatile markets

Dollar-cost averaging is a way for an investor to ignore short-term volatility in the broader markets. Investors who stay invested through the market lows, stand to reap the most returns over the long term. Looking back at stock market returns since the 1920s, investors have rarely lost money investing in the S&P 500 for a 20-year time period.