The Merits of Dollar Cost Averaging September 15, 2023
Have you ever seen your colleagues, friends or family members on the phone with their stockbrokers, frantically trying to sell their stocks because the market is crashing? Or perhaps you’ve witnessed the complete opposite — where everyone is scrambling to buy stocks at the best possible price because the market is rallying.
Having been on both sides of the coin myself, I couldn’t help but think, that it was far too stressful and definitely not the right way to invest. Hence, for the readers out there, I would love to share my two cents on what I believe is a good investment strategy.
Why Timing the Market Isn’t a Good Strategy
For those who are unsure what timing the market is, the abovementioned scenarios of individuals scrambling to buy and sell stock are perfect examples. It is an approach that’s strongly based on the age-old mantra of: “Buy low and sell high.” Sounds like common sense? Well, the practical application is in fact far more complex than it seems. Let me explain.
Stock markets are in a state of frequent fluctuation. Therefore with prices constantly changing, it is near impossible to capture the ideal moment to buy a stock. In fact, many investors who try to time these movements are often late to react and only realise they’ve missed the perfect buying opportunity once it has already passed. This reactive strategy keeps them forever chasing the market, rather than leading it.
The result of this constant chasing is the high levels of stress and emotionally-driven decisions. When that happens, investors tend to forego their investment strategy and objectivity, and make rash decisions that could have dire consequences.
So what’s the alternative?
Why Dollar-Cost Averaging is a Superior Strategy
Unlike chasing constant fluctuations, the Dollar-cost averaging (DCA) strategy represents a long-term approach whereby an investor makes consistent, regular purchases of preferred investment products. This approach, barring any exceptional circumstances, facilitates the gradual accumulation of assets in your investment portfolio over an extended time frame.
So what makes this approach more favourable? On an emotional level, dollar-cost averaging simplifies the investment process for you. Money is invested consistently on a monthly basis regardless of market conditions. With this disciplined approach you tend to be less emotionally impacted by market volatility and, as a result, less susceptible to poor decision-making. Hence, the main advantage of DCA is that it reduces the negative aspects of investor psychology and market timing on a portfolio.
Why New Investors Should Take Advantage of Dollar-Cost Averaging
Generally, individuals new to investment tend not to have large sums of money at the start. It is very probable that they also do not know where to begin. DCA is thus perfect in this situation. Investors can set their desired monthly investment amount, taking away the stress on investors’ finances. Over time, as their earning power increases, they can readjust their monthly investment amount to allocate more funds to their investment portfolio. This makes DCA the ideal strategy for new investors looking to build a long-term portfolio. Additionally, the hands-off nature of this strategy, can be ideal for inexperienced investors.
How Dollar-Cost Averaging Saves You Money
Apart from the previously mentioned advantages, the long-term nature of DCA reduces your average investment costs, thereby mitigating volatility risks. This is because the number of units or lots you acquire will naturally fluctuate with market prices. When prices are high, you acquire fewer units, and conversely, you acquire more units when prices are low. Over time, investors utilising this method would have spent less on their investments compared to those who try to time the market.
Dollar-Cost Averaging Builds Positive Habits
In addition to its many merits, DCA also fosters good investment habits. Regular commitments to your investments builds the discipline very much needed in wealth accumulation to help you reach your financial goals.
Hence, in my opinion, DCA is an effective investment strategy that minimises risk while fostering consistent growth. It is an approach that demands discipline but rewards you with mental peace and creates a more resilient portfolio in the long-run.
Contributor:
Lelauthe Devi D/O Ragu Singh
Senior Wealth Manager
Phillip Securities Pte Ltd (A member of PhillipCapital)
https://bit.ly/TTPlelauthe
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About the author
Lelauthe Devi D/O Ragu Singh
Senior Wealth Manager
Lelauthe is a 30-year veteran in the financial services sector and her passion is in helping others achieve financial freedom. She is a Senior Financial Consultant in Excelsius Group - a team of Financial Specialists who specialise in investment portfolio solutions at Phillip Capital. Lelauthe believes in regular savings investment strategies under her professionally managed unit trust wrap accounts. Lelauthe helps clients achieve solutions for the purpose of retirement planning.
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