What's dollar-cost averaging?
Let’s take a closer look at what a dollar-cost averaging strategy is and how it works. 🪄
What’s dollar-cost averaging?
Dollar-cost averaging is when you regularly invest the same amount in a particular investment, regardless of the share price. This means that when the price is high, you’ll purchase fewer shares, and when the price is low, you’ll purchase more. 🛒
The strategy aims to average out your cost per share over time, rather than catching the market at a specific high or low point.
Say you want to buy some shares in a company. They might cost you $2.40 per share today, $2.50 next month, and $2.20 the month after that.
If you’d invested $100 each month, you’d have 127.12 shares with an average price of $2.36 per share. But if you’d purchased all $300 worth at today's price of $2.40, then you’d only have 125 shares.
Sometimes you might make small gains (like in this example), other times you might make small losses. The idea is that if the investment’s share price is generally increasing over time, a dollar-cost averaging strategy can help to average out the price you pay for your shares along the way.
Why use dollar-cost averaging?
You don’t need to time the market ⏰
It can be tricky to know if you’re getting a ‘good price’ for your shares. (Even the pros struggle!) Since dollar-cost averaging aims to average out the amount you pay for your shares over time, there’s less riding on you purchasing your shares at a specific point in time.
You don’t need a lot of money 💰
With dollar-cost averaging, you don’t need a lump sum of cash to get started. Instead, you can invest more affordable chunks of money regularly—that might add up to a large amount over time!
It’s an easy strategy to stick to 🪁
Dollar-cost averaging can help you invest with confidence and make investing a habit. After you’ve settled on an investment, all you need to decide is how much and how often you want to invest—then you can use your investing strategy to help you average out the ups and downs of the market over time.
Like everything to do with investing—you’re not guaranteed positive returns through dollar-cost averaging, and you can lose the money you start with. Dollar-cost averaging is one of many investment strategies an investor can use.
If you’re starting your investing journey with a lump sum of money that’s ready to invest, one thing worth considering is if there’s any benefit to investing the full amount right off the bat instead of spreading your investments over a longer period of time. This is because generally, the earlier you start investing, the longer your investment horizon can be
But not everyone has the risk appetite to invest a lump sum of money all at once. (And that’s fair!) In this case, investing through dollar-cost averaging could be a way to build your confidence and grow your portfolio at the same time.
Put it into practice
One way to put dollar-cost averaging into practice through Sharesies is with auto-invest. Just pick an order, the amount you want to regularly invest, and how often, then auto-invest will place the orders for you! Alternatively, setting up an automatic payment to land in your Sharesies Wallet on a regular basis can help you stick to your own personalised dollar-cost averaging strategy. Nice one!
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.