You might have come across the term ‘dollar cost averaging’ when reading investment guides or when listening to your friends talk about their forays into investment.
Dollar cost averaging (DCA) is a well-known and rather common investment technique that helps mitigate risks and is often employed for long-term investments.
What exactly is DCA?
In dollar cost averaging, you buy a fixed dollar amount of an investment on a fixed regular schedule regardless of the price of the shares. When you use DCA, you set aside, say, S$500 every month to purchase shares of Company X.
When the share prices go up, you purchase fewer shares with S$500, and when the share prices go down, you get more shares in that month.
Here’s a simple example to illustrate the concept.
If you had spent S$1,500 and invested it all in March, you would have only bought 273 shares …