Why you need to know about dollar-cost averaging—Sharesies Australia

Why you need to know about dollar-cost averaging

10 March 2021

Ocean with lone stand-up paddle boarder in the distance.

It’s normal for share prices to go up and down—so how do you know when share prices are expensive or cheap?

Getting a ‘good price’

Often, it’s really hard to tell until after the fact. And even the pros can end up getting their timing wrong. There are many investment techniques that investors can use, including dollar-cost averaging.

Dollar-cost averaging is when you choose to invest a certain amount on a particular investment regularly, regardless of what the price is. This means when prices are high, you’ll end up with fewer shares, but when prices are low, you’ll end up with more.

It aims to average out the amount you spend on shares over time, rather than catching the market at a specific high or low point.

For example

Say I'm interested in buying some shares in a company. They might cost me $2.40 per share today, $2.50 next month, and $2.20 the month after that. If I invested $100 each month I'd have 127.12 shares with an average price of $2.36 per share.

If I purchase all $300 worth at today's price of $2.40, then I would only have 125 shares.

While that doesn’t sound like that much, if we extrapolate that out over bigger amounts and over your whole investing life, it can add up quite quickly. Not to mention the added stress of wondering whether you’ve just bought everything at the very top of the market (or sold everything at the bottom)!

Smooth ride

Averaging-in can be a really handy way to avoid the ups and downs of share markets. You can make regular purchases of small amounts whenever you like and start getting some runs on the board, rather than having to save up until you have larger amounts to invest.

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.