'Dollar Cost Averaging' is a method of investment and in all honesty, my favorite method of investing.
It means that you take a set amount each week or month and invest it on a set day. For example you may take $100 out of your pay check each week and invest it in an asset class.
A personal example for me is i take $100 each Friday and invest it in Icon (ICX), regardless of the price. Now sometimes i may slightly shuffle the days if i am away or busy but the idea is to take a set amount each week and invest it, regardless of the price of the asset which you are investing in.
The benefits?
Here are some benefits to Dollar cost averaging:
-It doesn't require large capital for an initial investment. Many people think of investing as taking a chunk of money and putting it into an asset. Dollar cost averaging mitigates this. You simply take a set amount of money each week and invest it. This money can come from your pay check or business. This means you don't have to take a huge loss to your savings in one hit.
It minimizes risk. It is far less risky to invest small amounts over time rather than a large amount in one go. For example, if you invest 10k into something and then the price falls drastically, you may see the huge loss and panic sell, however, if you have invested steadily over time then your average will be better. You may have bought 'X' amount of shares at $10 but 'Y' amount of shares at $2. This means your average earnings will average out at the price action moves up or down.
It is a more accessible form of investing to the common man. If you are fortunate enough to have huge stores of cash ready to invest then more power to you, sir!! You drop in those fattys and live life on the edge, however, if you don't have stores of money then dollar cost averaging could be your route into investing.
It teaches you discipline and also gives you stronger hands when looking at the market. Investing weekly gives you good insight into how markets move and what affects them.If you take a small bit of cash and invest it into something which has historically given returns then that cash will most likely be better used in DCA investing rather than holding it in cash. For example investing $100 a month in the S&P 500 index fund will grow your money because of interest. Keeping it in your bank will do nothing for it. (that is assuming the S&P 500 goes up - usually sits around 7% annual return)
So there are some benefits to Dollar cost averaging. I encourage keeping a spreadsheet to track your investments. I am doing an experiment over the next year and will post my results so people can see the workflow and profits / loss.
Chow for now.