What is Dollar cost averaging (DCA)?
Dollar cost averaging (DCA) has gained popularity among Singaporean investors in recent years. The premise behind dollar-cost averaging is straightforward: spread out your investments over a long period of time rather than making one huge one.
Using DCA, one can learn to invest in a sustainable manner
We all understand the value of investing, but we may be hesitant to put our money where our mouths are because of the fear of losing it all at once and the difficulty in timing our entry into the market.
However, the inertia can be avoided by instituting a DCA that automatically saves and invests a set amount each month, thus spreading out the effects of any market fluctuations.
The benefit of this is that it doesn’t matter if you’re just starting out; you can start investing with as little as S$100 a month in many different plans.
Moreover, even if you start with only $100/month, you’ll gain confidence in budgeting efficiently and developing a habit of investing the more you become used to setting aside your hard-earned funds for investment.
Here are some details concerning DCA to think about while deciding on an investment strategy.
Dollar-cost averaging's benefits
The use of dollar-cost averaging to break into the stock market has several advantages.
1. Not Needing to Time the Market
Market timing, as defined by Investopedia, is entering (buying) and exiting (selling) the market using predictive techniques.
However, as most seasoned investors will attest, it is extremely difficult, if not impossible, to anticipate the future prices of assets.
To reduce the stress of trying to time the market, dollar-cost averaging can be a useful tool. If a trader uses dollar-cost averaging, he or she will buy more assets when the price is low and less assets when it is high. Instead of taking the chance of purchasing while prices are high, they might instead pay an average price for their assets over time.
2. You can begin investing with a little initial investment
Dollar-cost averaging is a method of investing that allows beginners to get started in the market with a relatively small monthly investment. Individuals can begin constructing a long-term investing portfolio with as little as $100 per month with different automatic savings plans available in the market.
3. Set your own pace when you first begin investing
Making money in the stock market is more of a marathon than a sprint.
When they initially get interested in investing, some people put in too much money, too early, despite their lack of understanding.
Beginning with less capital and more time to acquire both experience and expertise is possible if you take things slowly and cautiously at first.
You can start making bolder bets and more informed forecasts about the market’s future as your experience and expertise improve.
How investing little amounts regularly can lead to substantial gains
Time and the impact of compounding returns cannot be emphasized when it comes to generating wealth. If you invest regularly over a long enough length of time, even a small amount each time will grow into a sizable sum.
In ten years, an investor who put away just $500 a month would have around $77,000 thanks to a return of 5% per annum (compound annually). If the time horizon is extended to 30 years, the investor will have well over $400,000 at the end of that time.
Investing for 30 years may seem like a long time, but it’s doable if you get a head start.
Investing steadily over time does not equate to being risk-averse
Dollar-cost averaging is often misunderstood to mean a lower level of risk. While there is some truth to this, it is certainly not a risk-free venture to undertake.
Whether you invest regularly in small amounts or dump a significant quantity of money into the market all at once, your investments themselves will account for the bulk of the risk you take on. Whether an investor chooses to invest in a single sum or by dollar-cost averaging, a portfolio composed only of high-risk, high-return growth stocks is still a dangerous portfolio.
Similarly, if you invest in only one or two stocks rather than a diverse portfolio, you’re taking on more risk. In this case, using dollar-cost averaging won’t help you avoid loss.
Investments that could benefit from dollar-cost averaging
Dollar-cost averaging is most often discussed in relation to stock investments, but it is applicable to a wide variety of investments. Bonds, ETFs, and unit trusts are all examples of such investments.
The investments you make should fit in with your own goals and tolerance for risk. You can achieve this by organizing your investments into various asset types.
To sum up
If any of the following describe your situation, DCA may end up being your best option.
- Are just in the first stages
- Trying to establish sound financial practices
- Can’t afford to invest all at once right now
- Wish to invest funds as they become available
Remaining invested through market downturns is less risky thanks to DCA’s ability to smooth out possible losses.
It is crucial to begin investing with a long-term perspective in order to appropriately prepare for retirement, regardless of the approach you ultimately choose to take.