Dollar Cost Averaging Explained - Articles & Commentaries

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01 November 2022

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What is Dollar Cost Averaging?
Dollar Cost Averaging (DCA) is an investment strategy whereby investors contribute a fixed amount to their investments regardless of market conditions. This helps to lower the purchase price of you investments over time by taking advantage of market dips as well as reducing the risk of bad timing or investing according to one’s emotions.

DCA in action
Let’s say we have two different investors, Adam and Ben.

Adam practices DCA by investing RM 200 every month into a unit trust fund. While the unit price may change every month, Adam consistently invests the same amount, which allows him to buy more units when prices are low and less units when prices are high. Over time, this allows him to lower down the average cost of his investment.

In contrast, Ben prefers to take an all-in approach and invests a lump-sum of RM1000 when the unit price is RM1.00.

Assume that the unit price of the fund rises to RM1.50 at the end, Adam and Ben’s total gains are calculated as follows:-

From the example above, it is clear that the DCA approach proves to be a much more effective strategy to ride out the volatility in markets and reduce risk of bad timing.

Consistency is Key
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Disclaimer
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