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Dollar Cost Averaging (DCA) is an investment strategy that involves consistently investing a fixed amount of money at regular intervals, regardless of market conditions. This method allows investors to buy more units in an investment when prices are low and fewer when prices are high, ultimately minimizing the impact of market volatility on their overall investment.
What is Dollar Cost Averaging used for?
The primary purpose of a DCA strategy is to reduce the risk associated with trying to time the market. Instead of attempting to predict the highs and lows, investors using DCA may benefit from the volatility and purchase units at a lower price than the initial investment. When prices are low, their fixed investment buys more units, and when prices are high, it buys fewer units. Over time, this helps to smooth out the average cost per share. It can also help to alleviate concern around investing large sums when markets are volatile, or at all time highs.
This strategy is particularly effective for long-term investors looking to build wealth steadily. By consistently investing over time, DCA takes advantage of the concept of compound growth. Compound growth allows the investor to benefit from the appreciation of the market and the increased number of shares acquired during market downturns. Most Australians use some form of DCA with knowing. Their compulsory superannuation guarantee payments from their employer consistently buys into their investments within their superannuation funds.
Is Dollar Cost Averaging just used for purchasing?
Whilst most investors will use DCA strategies to slowly enter into an investment, you can also use it to slowly exit positions in investments. If you know you need funds for a certain purpose, but you are not sure if you want to exit completely at one point in time, you can minimise the risk of selling at the wrong time by selling at set intervals and set amounts.
Conclusion:
Dollar Cost Averaging removes the emotional aspect of investing, promoting a steady and systematic investment process. It’s a simple yet powerful tool to navigate the unpredictable nature of financial markets with a long-term perspective.
If you want to discuss a DCA strategy and whether it is appropriate for you, contact MLS Financial today through our online contact form.
Disclosures:
- This information has been compiled from sources considered to be reliable, but is not guaranteed.
- Past performance is not a reliable indicator of future performance.
