Dollar Cost Averaging: Smart Investment Strategy

DCA / Dollar Cost Averaging is an investment plan that provides for increasing investments by investing a fixed amount on a regular basis.

DCA strategy - purchase at average cost. The familiar hypothesis is put forward that it is human nature to be subject to emotions and to make mistakes. The securities market fluctuates every day and it is difficult to predict its short-term fluctuations. You can accidentally buy at the highest price and wait a long time for the market to return to that level. Proponents of this theory are based on the assertion that in the long term, any investment should grow. They recommend investing the same amounts in the same types of investments at regular intervals (for example, once a month). The strategy actually reduces the risk of a portfolio falling sharply.

When is this strategy most often acceptable:

The investor has limited funds and invests small amounts;
When purchasing endowment insurance;
With monthly contributions to RRSP;
When the market falls (no one knows when the fall will stop and growth will begin);
If the investor does not have enough knowledge or time to manage his portfolio;
If the investor does not like risk.
The disadvantage of the strategy is that it limits the growth of investments when the market grows. Not only large losses are excluded, but also large portfolio growth. When the market is at its peak and it is necessary to sell, the investor continues to invest. This reduces potential income. Also, when the market is “down”, it would be necessary to purchase more, but the investor invests the same amount.