Dollar Cost Averaging (DCA)

What is DCA?#

DCA is an investment strategy that reduces market risk and volatility by spreading out the purchase of an asset over several smaller purchases over a period of time at different price point instead of purchasing the asset at a single price point.

Example#

An investor decides to DCA by investing RM1200 over 6 months (RM200 per month) regardless of the current market price. Over the 6 months, the purchased prices are RM100, RM120, RM80, RM90, RM110, RM115 and the purchased units are 2 units, 1.67 units, 2.5 units, 2.22 units, 1.82 units, 1.74 units. By 6th month, our investor accumulated 11.95 units and the investment would worth RM1374.25 yielded a profit of RM174.25 (14.52%).

Notice how the highest price was RM120 and even though in this example, prices never rose above that all time high, our investor still profit. Here lies the power of DCA.

Now, what would have happened if our investor tried to time the market? If the investor lump sum at 2nd month, he would be at a loss of RM50. If another investor had the luck to lump sum at 3rd month, then he would have made an amazing profit of RM525.

Why DCA?#

DCA works because prices have historically always shown a tendency to go up in the long term regardless of market crashes or any other temporary adverse conditions. Time in the market beats timing the market.

DCA encourages investors to adopt a mindset where investing is for the long-term. DCA can be achieved via the setup of an automated regular savings plan or make manual follow-up purchases. DCA is a good way to start investing for anyone with a monthly income and limited capital.