Ep.5: Dollar-Cost Averaging
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Hello and welcome back to Money Matters where I guide you in becoming a better, more confident investor. In our world it seem that everything is becoming more autonomous for subscriptions, to driving, to the way like to get our news. To the fact that Amazon knows everything about us in the sense of what we’d like and when we’d like it. And this is all steaming from consumers demand, or your demand for convenience and the desire to make things more simplistic. My argument in this video is why not take that same approach to when it comes to your finances and the way that you invest.
Allow me explain the idea of dollar cost averaging. This is the practice of systematically investing a consistent dollar amount in the same investment over a period of time. Like clock-work. If you’re invested in your company’s 401k and you make contributions then whether you know it or not you’re already harnessing the power of Dollar Cost Averaging as you make those monthly automatic contributions. This is such a great tool if you’re in the wealth accumulation phase, are less experienced in investing, or simply know the importance of investing, but don’t care to get involved past a certain point, then Dollar Cost Averaging might be for you! And let me explain why.
Right off the bat, with this automatic investment strategy you are eliminating the emotional component of decision making when it comes to investing. Which can prove to be more important than your intellect when dealing with your investments. Once you’ve picked out a quality fund with a good track record and management team then you don’t really care all that much about what percent the fund is up or down when you’re making the monthly investment, you just care about sticking to the plan of making those monthly investments. Month after month.
This way, you will be way less likely to sell your investments when the price goes down in volatile times, but rather see it as an opportunity to acquire more shares of your fund at a more affordable cost. For an example. Say that you want to Dollar Cost Average and invest in ABC Fund Company. And on the first of every month you’ve decide that you can purchase $200 dollars’ worth of this company. Now if that first month the fund company is trading at $20 a share you’re able to purchase 10 shares of that company. (10 share x $20 a share equals that $200 investment). The next month in keeping with your dollar cost averaging ways, on the first you go to purchase $200 worth of fund ABC again, but the market this day is volatile and the stock has gone down to $15 a share. Now you’re getting the fund at a more affordable price so your $200 can now purchase 13 1/3 shares! And this goes both ways - say the following month the fund’s share price is up to $25. Now your $200 monthly purchase affords you 8 shares. Again, 8x$25 a share = your $200 investment. So with dollar cost averaging, over time this where the name comes from as it applies. When the fund’ share price is higher your fixed amount purchases less shares and when the fund’s share price lower you can purchase more shares smoothing out the purchase price to the average allowing you to treat this as a fixed cost to paying your future self!
Dollar Cost Averaging can also stop you from trying to time the market, or find that best time to put your money into the market trying to take advantage of the old buy low sell high routine. This extremely difficult and more often than not unsuccessful. Remember it’s not timing the market, it’s time in the market which separates a lot of the winners from losers when it comes to their investment success.
If you’re newer to investing and want to invest a small amount and continue to do so on a monthly basis until it become a habit, this could be the way to go! And then over time as you become more comfortable with how markets work you will be ready to discuss other strategies to take advantage of.
I hope this help you understand the power of dollar cost averaging! If you have any question give me a shout as I’m here to help! And as always, thank you for giving your finances the attention that they deserve!
