Dollar cost averaging

A Financial Services Partners Adviser may recommend a Dollar Cost Averaging (DCA) strategy as a part of your investment portfolio. They will consider your needs, objectives and situation before they decide if dollar cost averaging is right for you.

What is dollar cost averaging?

Investment markets fluctuate. Therefore it is difficult to choose the best time to invest. One strategy to cope with the risk associated with investing in volatile markets is DCA. DCA involves investing a set amount on a regular basis, no matter whether the market is up or down.

The advantages of this strategy are:

  • you effectively average the purchase price of your investment because you have bought at both high and low prices over time. When the unit price is high, you buy fewer units. Alternatively, when it is low you buy more units for the same investment amount, and
  • you reduce the risk of investing at the least favourable time.

Using the table below as an example, we compare the option of investing $120,000 all at once against investing $10,000 per month over 12 months into an investment portfolio.

You can see in this example that if you regularly invest throughout the year in a fluctuating market, you would be able to buy more units at a lower average unit cost - $9.01 as opposed to $10. Averaging the price of your investment is the key to the DCA strategy.

Also, by using term deposits or savings accounts to ‘park’ your money while it is waiting to be invested in a managed fund portfolio, you can continue to earn interest. In this example, if you use a savings account you can earn an extra $4,180 in interest.

Month

Unit Price

Investing once

Investing monthly

Amount Invested

Units Purchased

Amount Invested

Units Purchased

1

$10.00

$120,000

12,000

$10,000

1000.00

2

$11.00

-

-

$10,000

909.09

3

$10.00

-

-

$10,000

1000.00

4

$9.00

-

-

$10,000

1111.11

5

$8.50

-

-

$10,000

1176.47

6

$7.50

-

-

$10,000

1333.33

7

$6.50

-

-

$10,000

1538.46

8

$8.00

-

-

$10,000

1250.00

9

$8.50

-

-

$10,000

1176.47

10

$10.00

-

-

$10,000

1000.00

11

$10.50

-

-

$10,000

952.38

12

$11.50

-

-

$10,000

869.57

TOTALS

$120,000

12,000

$120,000

13,316.88

Average unit purchase price

$10.00

$9.01

Investment Value
(end of 12 months)

$138,000

$153,144

Interest from savings account

Nil

$4,180

Portfolio Value1

$138,000

$157,324

1 For illustration purposes only. Ignores all fees and taxation. If the unit prices were reversed (for example, month 1 was $11.50 and so on) the difference in the Portfolio Values from the frequency of investing would be even greater - Investing once $104,347; Investing monthly $137,348. Distributions paid from investments and interest earned from the term deposit have been excluded from both examples in order to more simply demonstrate the DCA strategy in action.

What kind of goals can dollar cost averaging be used for?

Dollar cost averaging may be suitable for people who:

  • wish to accumulate wealth
  • wish to reduce the risk within their investment portfolio
  • are able to make ongoing contributions to their investments.

A Financial Services Partners Adviser may recommend a dollar cost averaging strategy as a part of your investment portfolio. They will consider your needs, objectives and situation before they decide if dollar cost averaging is right for you.

If you're ready to see how dollar cost averaging can work for you, we can match you with a suitable Financial Services Partners Adviser who will be happy to begin working with you to create a financial plan that's right for you.

To get started, please use our adviser matching service.



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