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Anonymous

13 May 2019

Is dollar cost averaging really that effective?

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    What are your thoughts?

    I feel that its a good way to reduce risk/losses and also help promotes good investing habits thru DCA and regular investing.

    Downside is that it may incure more sales charge if your DCA amount is low and the bank charges a high min sum

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      Jansen Ng

      Jansen Ng

      10 May 2019

      Level 7ยทBusiness Student at Ntu

      Short answer: Yep.

      Long answer: If the market is consistently on an uptrend, lump sum definitely beats DCA.

      But if the market is on a downtrend, DCA beats lumpsum.

      How about if the market fluctuates and ends at the same price as at the start of your investment? (assuming the start and end of investment period is the same price)

      • Zero capital appreciation for lump sum investing (0% returns)
      • Gains achieved from DCA. Because of the idea of DCA, we actually buy more units when the price is lower, and buy less when the price is high. Hence, if we dollar average the units bought, it will be lower than the starting price

      Consider the following simplified example: 1st mth: 1k at $1 = 1000units 2nd mth: 1k at $1.1 = 909units 3rd mth: 1k at $0.9 = 1111units 4th mth 1k at $1 = 1000units

      Total number of units: 4020units for 4k ($0.995 per unit) Compared to lump sum where its 4000units for 4k ($1 per unit)

      Simplified example, but the idea is there

      Hence DCA is advised because we wouldnt accurate guess where the market is heading

      Other advantages include

      • Easier, no need to think, just do. Can even RSP and set up once and forget about it
      • Leaves emotions out of the game
      • Sets aside a certain amount of salary to be channelled here, ie invest the money as it comes, to get more time in the market
      • Not necessarily DCA every month. Some do it monthly, some quarterly, some every 6 mths. Also depends on your investment amount (due to fees)

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