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There’s a lot been said in the media recently about the investment concept of Dollar-Cost Averaging. One of the reasons that it is becoming increasingly popular is because it’s an ideal way to accumulate savings to fund retirement and/or education.

First, the backdrop.  Whichever way you look at it, we all need to become more self-reliant in our maturing years. We’re all living longer, meaning the money we do save has to last longer; plus the State is not looking in the best position to care for us, like it has done for previous generations, in our retirement.

In addition, there are the pressures of ever more competitive globalisation, and the importance of providing the best possible education we can for our children and grandchildren cannot be overstated if they are to succeed in life.

In order to secure the funds necessary to be able to enjoy the retirement we desire and to provide the highest standards of education we can for our loved ones, careful, wise and diligent investment is key.

How to work out dollar cost averaging

So what is Dollar-Cost Averaging?

The principle is that sound stocks and organisations gain value over time, even if during that time there are intense swings in those markets.  It assumes, and in most cases quite correctly, that in the long term the value of stocks and organisations will always be higher.

By investing smaller amounts on a regular basis over time, rather than approaching the financial markets with a one-off lump sum, the investor will have an overall higher value return.

For example, invest $100 dollars a month every month whether the stock goes up or down and you’ll buy more shares if the stock goes down but you’ll buy fewer shares when the stock goes up.  At the end of, say, five years you’ll have invested $6,000 and will have more shares than if you’d put $6,000 in at the start.

Dollar-Cost Averaging enables the investor to benefit from falling markets whilst minimising exposure when markets are high. Over time this provides a smoother return without any need to guess, or time, investment opportunities.

Investing smaller amounts over a longer period of time rather than a lump sum at any one given time is also a good investment discipline.  Something that is not uncommon to clients with our various long term investment plans and planning.

Are there downsides?

Some critics claim that Dollar Cost Averaging is just a marketing gimmick and therefore not a sound investment strategy.  But the facts speak for themselves and certainly point the other way.  For example, if you’d been Dollar Cost Averaging into the S&P 500 index fund throughout the 2000s you’d be up almost 25 per cent compared to being about flat if you’d made a one-time investment on January 1st 2000.  And this is just one of many positive examples.  A quick Google search will provide plenty more.

Given the current volatility of markets and an overwhelming need to secure long term financial security, it’s certainly worthy of your closer attention.

What is dollar cost averaging?

About Mike Coady

Mike Coady is an expat expert based in Dubai and is on hand to help with all of the above and more.

Mike is an award-winning money coach and industry leader in the financial sector.

Qualified to UK Financial Conduct Authority (FCA) standards, a member of the Chartered Insurance Institute, a Founding Fellow of the Institute of Sales Professionals (FF.ISP), a Fellow of the Institute of Directors (FIoD) and featured as a highly qualified Financial Adviser in Which Financial Adviser.

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Blog published by Mike Coady.