What Is Dollar-Cost Averaging (DCA)?

Dollar-cost averaging (DCA) is a less-measured investment plan that helps investors eliminate emotion-based decisions. Here, the investor looks to mitigate the effect of price volatility by spreading purchases across predefined intervals. Instead of investing a lump sum in an asset class, the investor chooses to invest a fixed amount weekly, monthly or on a bimonthly basis. This is done regardless of the changes in prices.

Think of dollar-cost average as a viable means of navigating a volatile market without having to gauge the best entry point. Since the capital is spread across predefined intervals, the strategy tends to smoothen your purchase prices over the duration of the investment. This is a lot better than investing a lump sum at a peak price.

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David@richlifewithdavid

09 Oct 2021

Chong Hwee is spot on about DCA not always the best approach depending on where the price levels are.

Other than averaging out your entry price, it’s also a means to help people be discipline in putting their money to work consistently, rather than having to apply discretion. It’s like CPF - your employer/employee contribution just keeps happening every month without any surprises. Check the balance after 5 or 10 years and it will be a good sum of money.

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Tan Choong Hwee

09 Oct 2021

Investor/Trader at Home

You can think of DCA as diversification across time.

While it is a lot better DCAing than lump sum at peak price, the opposite can happen too, i.e. lump sum at valley price is a lot better than DCA. And some studies have shown that lump sum performed better than DCA, even if it was lump sum at peak price, simply because the full lump sum is riding the long term up trend right from the beginning and enjoy full benefits of compounding effect.

The real advantage of DCA is the elimination of emotion in investing.

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