Let’s talk about one of the best concepts in investing: Dollar Cost Averaging! If you’re not using this to your advantage, you should be! For today’s explanation, I’ll turn to one of my favourite investing authors, Nick Murray. Here’s an excerpt from his book “Simple Wealth, Inevitable Wealth” (which I highly recommend).
Compounding is only one of two powerful wealth-creating engines which are activated by regular monthly investment. The other is dollar-cost averaging, which completely relieves you of any need to try to ‘time’ the markets, sectors or individual funds. Dollar-cost averaging (DCA) does that for you… because you invest consistently every month, giving DCA the chance to do its glorious work. Dollar-cost averaging is heaven’s own market timing system for the blissfully clueless.
The principle of DCA is fairly simple. By investing the same dollar amount every month, you buy larger and larger numbers of fund shares when the market declines. You buy, in other words, more and more aggressively as share prices get cheaper. When markets rise again, your same dollar investment buys fewer and fewer shares as they become progressively higher priced. Logically, you buy the largest number of shares precisely at panic-induced market bottoms, and the fewest shares at euphoric market tops—which is, of course, exactly the opposite of what most investors do.
You end up with a below-average cost, because so many of your fund shares were purchased at relatively low prices and so few were bought at high prices. And below-average costs lead—mathematically, inevitably—to above-average returns. The genius of DCA is that, when you abandon any hope of timing markets/investments and simply toss in the same number of dollars every month, your “timing” effectively becomes perfect.
~Nick Murray, “Simple Wealth, Inevitable Wealth”
What about you? Do you use dollar cost averaging in your investment plan? If you want to talk some more about how you can incorporate this into your investment strategy, contact me!