Dollar-Cost Averaging (DCA) is an investment strategy that often gets brought up when people talk about regular savings plans. But what is it exactly and how does it work? Read on to find out.
What is Dollar-Cost Averaging?
Dollar-Cost Averaging (DCA) is an investment strategy. With this strategy, the investor divides up the total amount to be invested across regular and timely purchases of an asset to reduce volatility impact. There is a greater focus on the long-term and investment journey than there is to make immediate profit. By regularly contributing a set amount of money into your plan, you avoid having to time the market to purchase assets at the best prices.
How Dollar-Cost Averaging works
DCA is often popular in the use of wealth management and regular savings plans in particular, because they are used to build savings over a long period. The primary goal of DCA is that it can neutralise short-term volatility by spreading the investment over a long period of time and riding the general uptrend of the market.
In a regular savings plan, for example, monthly contributions are made to the account and invested into funds, trusts, or equities, and from there, it snowballs into a larger sum of money.
DCA also works in employee savings plans, which are pooled investment accounts that are provided by an employer. Employees set aside a portion of their wages (pre-tax) to contribute to the account and the employer usually mirrors this portion.
Benefits of Dollar-Cost Averaging
There are many advantages of Dollar-Cost Averaging:
- They reduce risk
One of the most obvious and biggest benefits of DCA as an investment strategy is that it reduces risk. While many traders like to invest in the commodity market to hedge against other volatile financial markets, DCA can be used to purchase equities and provide liquidity and flexibility in managing a portfolio.
- They can help you ride out market downturns
Another benefit of dollar-cost investing is that investors can ride out market downturns with this form of long-term investment. By investing smaller amounts regularly but periodically, there is no big focus on buying equities at ‘the best price’ and instead, the investor can focus on aiming for a general market uptrend.
- You can invest with less
Many people cannot afford to contribute a huge amount of capital one-off when it comes to investing. With DCA, investors can choose to set aside small amounts of money to be funnelled into their portfolio regularly. This gives them more flexibility and it also makes DCA much more accessible to the regular investor.
- They train you in discipline
A lot of the time, people refrain from investing when markets are down out of fear of losses. However, with DCA, regular investments are funnelled in even when the market is down. This can be advantageous, as it can help investors not miss out on future growth. The regularity of these investments also help hone discipline in investors as they know they have to set aside a certain amount each month instead of spending it.
Who uses Dollar-Cost Averaging?
DCA can be used by anyone. However, these are the groups of people that tend to favour them:
Beginners favour DCA as they are a generally more risk-averse demographic and also may have less to invest at a time. DCA allows them to dip their toes in markets as they learn.
- The risk-averse
DCA is considered to be much lower in risk than ‘traditional’ trading, such as the trading of stocks, forex, crypto, CFDs, and others. The risk-averse therefore may find it more appealing.
- Traders who want to diversify their portfolio
Those who want to diversify their portfolios can trade ‘traditional’ stocks using other methods and invest with DCA. This can be a great tactic for those who want to grow and preserve their capital at the same time.
- Those with savings accounts
Savings accounts by nature use DCA as an investment strategy, be it a regular savings plan or an employee savings plan. Regular investments are made each month and compounded slowly over the years until retirement or some other life event such as graduation and marriage.
Get started investing through Dollar-Cost Averaging
If you are eager to get started with DCA, one of the simplest ways is to open a regular savings plan and see for yourself how this method works. For more information, you can visit https://www.home.saxo/en-sg/products/regular-savings-plan.