How Does Dollar Cost Averaging Works?

Posted by Grace under Investing on August 21, 2015

Want to know how does dollar cost averaging works? I am doing a cost averaging in mutual funds and stock market investing. Today we will talk about dollar cost averaging, what it is all about, how does it work, the DCA benefits and the risks accompanies in dollar cost averaging.Few years ago, when I learned stock market investing and mutual funds, I asked myself, which is better. To invest in lump-sum or to invest using DCA?

  • Lump-Sum – a huge or large amount of money to be invested one time. This will work to a “buy and hold investing” strategy.
  • Dollars Cost Averaging (DCA) – investing money in a regular interval (example every month, every quarter or every year).

How Does Dollar Cost Averaging Works?

Before you try DCA, make sure you analyze if this strategy can help you achieve your financial goal. Sometimes, there is a big advantage in investing lump sum. I am in a learning experience finding which is better, DCA or lump sum – the result should be publish here. I make a lump sum investing in mutual fund equity and lump sum in stocks.
I am buying stock shares worth $100 per month and invest $5,000 in mutual fund equity. I am still analyzing which is good. Anyway, this experiment was started last September 2014. I will update in this blog about DCA vs. Lump Sum on September 2020 (Don’t Laugh). I know you can wait for the result.

DCA Procedures and Benefits

The procedures in dollar cost averaging is simple. Decide how much money you want to invest per month or per quarter. Decide where you want to invest DCA. Dollar cost averaging will work in mutual funds and stocks market investing.

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The benefits of investing using dollar cost averaging are as follows;

  • Buy more shares if the price per shares are low
  • Buy few shares if the price per share are high
  • The risk is moderate since you are just investing small amount of money regularly compare to investing large amount of money.
What about you? Do you have any investing experience using DCA or dollar cost averaging? Where do you use DCA, stock market investing or mutual funds? Please share your opinions about DCA. Thank you!

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