What is dollar cost averaging? Let’s say you have a large sum of money. Maybe you have just inherited a large amount of $100,000 or just won the lottery which awards you $1,000,000! But luckily you are smart enough to know you should invest the newly-found large amount of money. But should you invest 100% (lump-sum) into investments alone? This is when dollar cost averaging (‘DCA’) comes in.
The conventional wisdom is to lock it in a savings account right away. Rightfully, this should earn you long-term compounded interest (fixed deposit accounts) despite the low number of the interest rate of return. But in some countries, you don’t get any returns if you save your money in the bank! Clearly, you know that the big amount of money should be worked at somewhere else.
The other big mistake people make is not being patient. They so often go into investments which operate on a timely-basis or seasonal-influenced. There is absolutely no need to rush when it comes to investing in assets. While this may work very well for short-term investments, you will ultimately want to look for the long-terms which are safer. This is especially true with the amount of money that you have.
This is where dollar cost averaging comes in. You get to invest your cash in equal chunks regularly. For example, you invest every month into a diversified group of investments. With $100,000 in your hand, you will be investing $5,000 every month. This will take you 20 months for you to completely invest your huge amount of $100,000. The good news is, the accumulated amount of money is still working for you while you are at it, earning you interests.
What is the advantage of ‘DCA’? It allows you to go into high-risk investments slowly. It is a better alternative than jumping in and investing 100% of your $100,000 in one go. If you use the ‘DCA’ method, you will benefit from lower-cost prices in future.
What about the disadvantages of ‘DCA’? If the price of the investment goes downward in time, then it can give people a scare. Opting for ‘DCA’ also increases your tax complexity. This is due to the number of times you make purchases.
How can you make ‘DCA’ work for you? You would want to use ‘DCA’ as your prime investing method when your $100,000 makes up most of your investment money. Also, this will be beneficial for you if you can stick to a schedule regularly. In avoiding being scared of price fluctuations as time goes, get the payment done automatically every month.
Posted in Fixed Deposit Accounts & Certificates | 
Tags: Assets, Big Mistake, Deposit Accounts, Interest Rate, Investing, Lump Sum, Money In The Bank, Rate Of Return