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Investor Education > Investment Basics > Dollar Cost Averaging

DOLLAR COST AVERAGING

Dollar cost averaging is a simple strategy investors can employ to smooth out market volatility.

It is almost impossible to time the market perfectly when investing. Not only is the risk that an investment is made at the “wrong time” but the greater risk is that in waiting for the "right time" you’re not invested in the market at all. The risk of getting the timing wrong can be minimised, however, if the investment is made over a set period of time.

The following provides a dollar cost averaging example - suppose you make a one-off investment of $1200, at $10 per unit you are able to purchase 120 units.

To offset the risk of making a badly timed investment, you spread your investment over 12 investments of $100 per month. It does not matter whether or not prices are high or low - with dollar cost averaging you purchase more when prices are low and purchase less when prices are high.

In the long run, the costs average out and there is the potential for investment gain. This strategy does not guarantee an investment gain or higher returns, but it engages the time in the market philosophy of investment whilst dealing with the volatility of the market.

One simple way to execute a dollar cost averaging strategy is to utilise a regular investment plan (also known as regular savings plans). Regular investment plans are available through most managed funds, allowing you to make minimum monthly investments of as little as $100 per month. Dollar cost averaging can be more difficult when investing directly in shares, due to the transaction/brokerage costs of buying small parcels of shares. One way to get around this is to invest in direct shares through a separately managed account like BlueChip 20.

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