fbpx

Dollar Cost Averaging

Dollar cost averaging is an alternative strategy to investing a lump sum. Using this approach you invest a set amount at regular intervals over time. This method of investing can be a powerful risk reduction strategy during times of market volatility or uncertainty, and can help you avoid the pitfalls of trying to choose the best time to invest.  

Investor A: $200,000 lump sum investment with no dollar cost averaging 

month unit price ($) units purchased value of investment ($) 
1 1.00 200,000 200,000 
2 0.70 0 140,000 
3 0.80 0 160,000 
4 0.90 0 180,000 
5 1.10 0 220,000 

Investor A’s patience has been rewarded by an increase in the value of the initial investment. 

 

Investor B: $200,000 invested over five months, at $40,000 per month dollar cost averaging

month unit price ($) units purchased value of investment ($) 
1 1.00 40,000 40,000 
2 0.70 57,143 68,000 
3 0.80 50,000 117,714 
4 0.90 44,444 172,428 
5 1.10 36,363 250,745 

Investor B has a greater investment value at the end of the five months. By committing to a regular investment amount, despite the fluctuating price movements, Investor B was able to purchase some units in the managed investment at a reduced price. In fact, the average unit price that Investor B was able acquire units for was $0.88. 

Lump Sum or Dollar Cost Averaging? 

The principle of dollar cost averaging does not mean that investing a lump sum is not an appropriate strategy. If markets rise in value over a long period of time after you make your initial lump sum investment, this method can be advantageous. 

However, if you are reluctant to commit a lump sum in an uncertain market, dollar cost averaging can help minimise the risk of timing your entry into the market. If you enter into a dollar cost averaging strategy it is important to view it as a risk minimisation strategy as opposed to a way of maximising returns. 

As always, if you would like to discuss the contents of this newsletter please give us a call 07 5559 5760.

Centaur Financial Services

Centaur Financial Services work as your partner, helping you navigate through the financial ups and downs life throws at you. First, it starts with your goals. Then it’s a lifelong commitment to achieving short, medium and long term objectives through a range of financial strategies and structures.

View All Services

Contact Us To Schedule A Free Consultation

Complete the following form and we will be in touch to arrange a free appointment.