What is dollar-cost averaging

What is dollar-cost averaging?

POSTED ON 05 JANUARY 2019

Dollar-cost averaging is when you contribute a fixed amount each month to invest on a regular basis, such as to buy into a chosen fund. The premise of dollar-cost averaging is that you can never perfectly time the market to buy low and sell high all the time, hence investing in a Regular Savings Plan allows you to buy more units when prices are low and fewer units when prices are high.

Although this strategy does not protect you from market fluctuations, the average cost of investment overtime could be lower compared to when you make one-off investments.

How does a Regular Savings Plan (RSP) work?

  • 01

    An individual invests $1,000 into a fund every month.

  • 02

    The market dipped in April and May but the investor continued to follow a regular investment plan.

  • 03

    When markets recovered in July, the investor's regular investment plan has resulted in the purchase of 4,136 units, valued at $5,170.

  • The table below illustrates how this works in your favour.
  • Amount Invested $
  • Unit Price $
  • Units Purchased $
  • Cumulative Value of Investments $
  •  
  •  
  •  
  •  
  •  
  • MARCH
  • 1,000
  • 1.25
  • 800
  • 1,000
  •  
  •  
  •  
  •  
  •  
  • APRIL
  • 1,000
  • 1.20
  • 833
  • 1,960
  •  
  •  
  •  
  •  
  •  
  • MAY
  • 1,000
  • 1.15
  • 870
  • 2,878
  •  
  •  
  •  
  •  
  •  
  • JUNE
  • 1,000
  • 1.20
  • 833
  • 4,003
  •  
  •  
  •  
  •  
  •  
  • JULY
  • 1,000
  • 1.25
  • 800
  • 5,170
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  •  
  • 5,170 + Gain of $170

By comparison, if he had invested a lump sum of $5,000 in March, the value of investment would have remained unchanged

It is impossible to predict when the best and worst returns will occur. This strategy is especially useful in a volatile market or when you are unsure of where the market is headed.

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