Dollar Cost Averaging
So many people spend so much time thinking about when is the “right” time to invest.
What if I told you there’s never going to be the right or perfect time.
Markets can move incredibly quickly and in so many unexpected ways so no-one knows when the best days are going to be.
When markets are volatile it’s easy to think I’ll wait until the markets improve and then I’ll start investing.
But the thing is missing the 10 best days of market performance for the ASX from 31 Oct 2003 to 4 Jan 2023 means your investment would be worth $19,915 less.
Missing the 10 best days of market performance for US shares for the same time period means your investment would be worth $29,281 less.
This is why dollar cost averaging into shares can be a great way to invest. Dollar cost averaging is where instead of making a one off investment, you systematically invest equal amounts at regular intervals regardless of price.
The share price of the individual share or Exchange Traded Fund (ETF) is likely to be different each time you invest, thus averaging out your buy prices.
It can also make it easier to deal with uncertain and volatile markets by making investments automatic and means you are more likely to benefit from the good days when the market rallies.
How dollar cost averaging works!
Dollar cost averaging works by investing every week, fortnight or month on a set day. For example if you elect to invest monthly and choose the first Monday of every month to invest in a particular share or ETF, you purchase it regardless of the share price on that day.
Here’s an example of how it could look:
You can see $100 originally bought 5 units, however as the share price fell the following month it bought 5.26 shares and the next month 5.13 shares. As the value of the ETF increased, the number of units purchased with $100 decreased.
The average purchase price is $20.03 and after the 6th contribution the overall value is $614.59.
It’s important to remember, that it could also look like this:
The overall value is lower than the amount you have contributed. However you can see that the number of units owned is greater than in the previous example. So if the value of the ETF increases over time, your overall value will increase more because you own more units.
Inside of Financial Freedom Fundamentals I teach my clients how to create passive income and increase their net worth. They not only have automated systems that work for them, they create overflow and have so much joy and happiness in their lives. All on the way to creating so much choice and freedom in their lives with abundance in all areas of their life.
This is general information and for educational purposes only.
