Let's take a deep dive into the basics of Dollar Cost Averaging.
At some point or another, every rookie investor will ask “When is the best time to invest?”. While the ideal time is when the market is low (so you get more bang for your buck), trying to predict the stock market is risky business even for professional investors!
Enter: Dollar Cost Averaging 💰 Dollar Cost Averaging (DCA) is an investment strategy where you consistently invest an amount into an asset, regardless of day-to-day price changes.
Let’s run through the numbers with a $1,000 investment
What are the benefits of Dollar Cost Averaging? 🫶
✅ Dollar cost averaging reduces the risk of trying to always ‘time the market’’ because consistent investing smooths out the share market price bumps. Plus you reduce the risks of emotional buying/selling!
✅ Helps you build healthy investing habits: Sometimes it’s tempting to use your savings on other goals (or spending). Yep, we’ve all been there. If you set up regular, automatic contributions to your investment account, you’re much more likely to invest and stick with your long term investment goals.
✅ Leverages compound growth: We’re big fans of the power of compounding, and DCA is often combined with a ‘buy and hold’ investment approach which allows time to work its magic in growing your funds (all while you sleep).
Okay so what’s the catch? 🤨
👉 Like with any investment strategy, DCA doesn’t guarantee returns or protect against losses during a declining market.
👉 Over the long term, DCA investing might result in lower returns compared to lump sum investing.
👉 Depending on your investment platform, you may need to pay more in brokerage fees because you’re buying shares more frequently, which can reduce your overall profit.
The verdict is in 😎
If you like structured, long term and low-stress investing, DCA could be a good investment strategy to consider. However, it’s always important to understand the risks of investing before diving in!
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