The 3 Money-Making Advantages of Dollar Cost Averaging

We’ve all been there.

Our phone in our hand, our online banking app opened up, ready to pull the trigger on a huge purchase. 

It’s exciting because this could really pay off.

It’s stressful because every investment comes with at least some element of risk. 

We’ve all struck at the right time and watched that one-time purchase gain steam and make us a tidy profit. We’ve also been on the other side of the equation, where our research doesn’t pay off and the fund goes the other way. 

That hurts, but it’s the nature of the beast. 

Well, what if you could switch to a strategy that took advantage of time and natural growth?

What is Dollar Cost Averaging?

Dollar cost averaging is an investment strategy where an investor buys a fixed dollar amount of an investment on a regular schedule, regardless of the movement of the share’s price.

As the price declines, you buy a fixed amount which gives you more shares. As it goes up, you buy a fixed amount which gives you fewer shares. 

And at the end you have your targeted investment in the shares, at a price that will not be the highest price payable for the shares. Nor will it be the lowest price available. It will be an average cost of the share for the period you used the strategy. 

Advantage 1: Doing Battle with a Volatile Market

This strategy is especially useful in times of economic turmoil. People who have invested in the oil and gas industry in the past half decade can certainly relate with this simple fact of life in that sector. 

Well, with markets such as these, buying at multiple times lets you avoid the risk of paying the highest possible price if you were to buy, say, once a year at the top of a market. 

Advantage 2: Easy Budgeting

Let’s say you’ve done your research on a product that’s been steadily growing for the past year or so. It’s a fund you believe in and you want to support. 

Well, if this product is going to grow over the long run, buying into it multiple times lets you pay smaller, easier-to-manage amounts throughout the year. This way you don’t have to save up a lump sum to invest. You can set up automatic payments to steadily grow your investment portfolio over time. This strategy lets you devote a specific amount each month so you can use the rest of your savings on other things that aren’t related to investments.  

Advantage 3: Early Returns

A single grain of sand isn’t much when you start building a pyramid, but if you’re multiplying that grain every day, the results are going to add up quickly. 

Dollar cost averaging allows your investment dollars to start working for you much more quickly because you’re not waiting for a one-time annual deposit. Buying multiple times means you start earning interest and dividends right away. Plus, when you buy into something more often, even it’s at a small amount, you’re going to start to see growth quicker. 

It’s sort of ironic, sure – when you spread your money out over the longterm you’ll actually start seeing results much more quickly. Even if those results start out on the small end of the spectrum, we all like watching our investments grow at a steady pace, right?

Right!

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This post was written by Marco Faccone