“According to the office of national statistics – Of those who live until retirement, 93% will depend on friends, relatives and charity.”

Dollar Cost Averaging

If you are an investor looking for a strategy that lowers your capital and investment risk, you may well consider a dollar-cost averaging strategy.

The phrase “dollar-cost averaging” simply means investing the same amount of money in a specific investment over a certain period of time. An example might be investing  $600 per month in Facebook stocks. Instead of investing $14,400 as a lump sum, you may instead decide to invest $600 over a period of 24 months. If the price of the equity trades at $10 one month, you will buy 60 shares. If it later goes up to $12, you will purchase 50 shares that month. If the price then drops to $8 another month, you will buy 75 shares. With the general consensus that shares will always rise over time, you are able to take advantage of any negative price movements and essentially get a higher return than you would have if you invested via a lump sum.

Reduces Emotional Component

One main advantage of dollar-cost averaging is that by investing in this manner, you eliminate the emotional component of decision-making. Your investments each month are made regardless how much the investment has risen or fallen. Often, some investors would delay or postpone making a purchase if they feel the price is too high or if they feel the product could fall further. This can lead to missed opportunities, and therefore using dollar-cost averaging ensures that investments are made regardless of market movements.

Avoids Bad Timing

If you compare dollar-cost averaging with investing your money in one transaction, a lump sum investment, then there is the risk that you will invest just before a big market downturn. With dollar cost averaging, you are not investing the full amount, but instead just a small proportion. Of course, the other side of this coin is that you might also miss out on investing at just the right time, before the market starts trending upwards in a bull market.

Market Rises Over Time

It is generally accepted that markets increase over time, and so investing in a lump sum should fair better than a regular investment, over a set period of time.

Affordability

For obvious reasons, a lump sum may not be a viable option, and so a regular saving of a smaller amount on a monthly basis is much more affordable and suitable. In time this small saving each month will eventually grow to a lump sum that can be used to purchase a property, or fund a child’s education or buy a car.