What is dollar cost averaging?

Hi Sharon,

Your question is one I get quite frequently so let me explain what dollar-cost averaging is and why you may or may not want to do it.

Dollar-cost averaging (DCA) is a long-term investment strategy designed to reduce the potential volatility of your investments. Instead of investing a lump sum of money all at once, you invest a fixed amount at regular intervals over a period of time. This could be weekly, monthly, quarterly, etc.

Here’s how it works: when prices are high, your fixed investment buys fewer shares (or units), and when prices are low, the same fixed investment buys more shares. Over time, this approach can lead to a lower average cost per share compared to making a single large investment.

DCA can be a good strategy for reducing risk, especially in volatile markets, because it mitigates the risk of investing a large amount in a single investment at the wrong time. However, it doesn’t guarantee a profit or protect against loss in declining markets, and you’ll need to be able to keep investing through all market conditions.

While dollar-cost averaging (DCA) can be a prudent strategy for some investors, it does have some potential drawbacks:

1. 🤔 **Opportunity Cost**: By spreading out your investment 💰 over time, you may miss out on potential gains if the market 📈 rises consistently.

2. ⬇️ **Lower Expected Returns**: Historical data shows that, over the long term, stock markets tend to rise. By dollar-cost averaging, you might limit your overall gains because you are not fully invested from the beginning.

3. 📉 **No Protection from Prolonged Market Downturns**: If the market enters a prolonged downturn, DCA won’t protect you. You’d still be regularly investing and therefore potentially buying as prices continue to drop.

4. 🎯 **Requires Discipline**: DCA requires consistent investing 💪 regardless of what the market is doing. This can be emotionally challenging, especially when markets are falling.

5. 💸 **Transaction Costs**: If you’re investing in a vehicle that has transaction fees each time you make a purchase, these costs could add up over time with DCA, reducing your overall return.

6. 🧩 **Complexity**: Implementing a DCA strategy takes more effort than making a lump sum investment. You have to remember to make the purchases, which can be time-consuming and potentially stressful.

Remember, whether or not DCA is a good strategy for you will depend on your personal circumstances, including your investment goals, time horizon, risk tolerance, and the specific investments you’re considering. It’s often a good idea to consult with a financial advisor or do your own research before deciding on an investment strategy. 👨‍💼👩‍💼📚

Hope this helps!

Best,

Zack Swad, CFP®, CWS®, BFA™, AWMA®, AAMS®
President & Wealth Manager, Swad Wealth Management, LLC
Tel: 707-899-1010
www.swadwealth.com
100 Stony Point Rd, Suite 244, Santa Rosa, CA 95401