Advantages and Drawbacks of Dollar Cost Averaging

Darryl Bachmeier
Jul 22, 2020
Finance


Some of you have heard of dollar cost averaging. It sounds interesting and it looks promising. If you are considering using it, keep in mind that first, you need to know all about the pros and cons of this strategy. There is no need to add you need to know what it is as well. Without further ado, let’s begin.

What is dollar cost averaging?

Dollar cost averaging is an investment strategy that has been with us for a long period of time. It means that you, an investor will invest lower amounts of money on a regular basis into stocks or something with the price that changes regularly. We used the stock exchange as the best and actually the most common example where we can see dollar cost averaging.

So you can either invest $10000 at once, or you can invest the same amount but in regular investments of $1000. Odds are something you will consider when using this strategy and they are actually more than just appealing in this case scenario.

It is important to add that dollar cost averaging does work well and it has been used by millions. Those who need and want long-term investments should definitely consider it.

Pros of dollar cost averaging strategy

If you are expecting to see 10 benefits, you are mistaken. The strategy we have here is considered as very simple and easy. It actually brings several major benefits. Now you can check them out below and better understand why dollar cost averaging is so appealing.

Everyone can make investments

Not all people have $10.000 ready to invest in stocks. But, most people can afford $10 or $100 to invest per month. This is one of the main advantages and one that made this strategy so popular.

The risk is decreased

Investing money is risky, period. But, using dollar cost averaging can decrease the risk significantly. After all, you are making regular, smaller investments. This is the main reason why the strategy is commonly used for uncertain or markets where prices fluctuate a lot. In addition, the unlucky timing factor is eliminated.

You get more for your money

You will buy stocks when they are low meaning you can end up with more stocks at the end. What this means is that dollar cost averaging can help you with the profit. Of course, you will get more stocks when the market is down but also fewer stocks when the market is on the opposite end of the scale.

There are no emotions present

You may want to invest all the money you have because of your emotions. It can end up well or be a complete failure. But, when you use dollar cost averaging emotions are out of the picture. You are making regular payments regardless of the situation and emotions you have at that moment.

Cons of dollar cost averaging

There is no perfection in this world, especially not with trading strategies. As such, dollar cost averaging does come with a few drawbacks. They can help you understand this term better and decide is it perfect for you.

Lower profit

Stocks that fluctuate a lot will usually go up significantly. Because you are buying them in smaller portions, you cannot use their lowest cost all the time. In other words, you are looking at a lower profit than investors who will invest the entire sum at once. This strategy isn’t the one that will help you get massive profits when stocks rise dramatically.

It is time-consuming

Investing $10.000 at once is simple and straightforward. But, investing the same amounts each month is time-consuming and you will need to monitor the process. There are a lot of things that will change and you must adapt to them. Depending on your case scenario, you are looking at regular checks, paying attention to several things and so much more.

It will cost you more

You will invest more often so you will use brokers more frequently. What this means is that you will have higher expenses per month or year if you like. There is one good thing about this. The fees brokers charge are lower than ever before so this is a downside, but not as huge as it was a while back. We believe that the fees will go down even more so it will be an even less-significant issue.

Should you use dollar cost averaging?

Dollar cost averaging is an effective and safe strategy. If you have a limited budget for investments and a lot of time, go for it. If you also don’t like the risk, this strategy is ideal for you. It is much safer than ordinary strategy. But, if you want as high a profit as you can get in the shortest period of time, this strategy isn’t for you.

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