Dollar Cost Averaging

Dollar cost averaging is an investment strategy where the investor splits up the amount to be invested and invests it over a period of time. The immediate effect of this is that the effective cost of the purchase gets averaged out over a period of time. This can shield the investor from a sudden increase in price. This makes it easier for people to enter the market. It reduces regret of buying for a high price as the purchase is split over time, and if the price drops you can still buy parts for the lower price.

In a way this strategy stretches the decision time. There is more time to change your mind in this kind of an approach. That can be a good or bad thing depending on the investing style. The time horizon in which the investments are spread over also matter. For example during the Covid-19 related volatilities, it wouldn’t have been wise to have a time horizon of 6 months. However, if the time horizon was 24 months, the volatility would be averaged out in the end.

Leave a Comment

Your email address will not be published. Required fields are marked *