Amongst other reasons noted in this article, ‘dollar cost averaging’ is one reason why regular investing can be a powerful method for building wealth.
On the face of it, after you invest in something, you want the value of it to go up. If it does, your wealth goes up. If the value of it goes down, your wealth goes down.
But consider the practicalities of how most normal working people save for the future. Each month, you receive your salary, and after paying your important regular expenses such as the rent or mortgage and the other regular bills, you hope to have some excess cash that you can put away as savings. You might even have budgeted to put away a certain amount of savings, so you know exactly how much it’ll be. Critically, however, you have little control over the date (unless you can choose your payday, but even then, it’s the same day each month).
Now, consider that you’ve been investing these monthly savings in an investment account, using the same simple passive equity tracker fund each month. As mentioned, since last month if the value of your fund has gone up, then your wealth has gone up, but that means that this month you can only afford to buy fewer units of the fund. If the value of your fund has gone down, then your overall wealth has gone down, but this month you can afford to buy more units of the fund. So, you end up ‘smoothing’ the average entry price you pay for your investments over time, buying fewer units when the price has gone up and more units when the price has gone down. Obviously you want the value of your portfolio to err on the side of increasing each month, but don’t be disheartened if it goes down, because it means you can pick up more units and get more money invested.
If you have come into a large lump sum of money and are planning to invest it, then dollar cost averaging doesn’t necessarily give you a superior strategy for getting your money invested. But if the source of your savings is monthly income from salary, regular investing is a natural strategy for building wealth. So, rather than building up a pile of cash savings and waiting for that opportune time to invest, consider the benefits of dollar cost averaging.
Regular investing is a powerful tool for building wealth, and it’s never too late to start, so start now.
We refer to lots of linked posts in this post. We hope that by following the links you can answer any questions you might have, but if anything is unclear in this post, or you have any questions relating to anything investment-related, please submit comments or questions in the section below and we’ll do our best to answer them.
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