Every smart and cautious investor knows that the only way to earn money from investment is “BUY LOWER and SELL HIGHER”. However, there’re not plenty of investors who can predict the best bid and ask price precisely.
─ Good at using Dollar Cost Averaging (DCA) to help you solve this problem easily. ─
What is "Dollar Cost Averaging (DCA)"?
- Dollar Cost Averaging is a kind of actuarial financial strategy. It could average the cost while buying the fund units in the long term and also reduce the impact of market volatility in the short term. It is also called “Unit cost averaging” or the “Cost average effect” generally.
- In brief, it is an investment strategy that investors will put fixed money into the investment at regular intervals. (e.g. once monthly)
- Regardless of market long or short position, it is required to invest regularly with a fixed amount. You will buy fewer units when the price is up and buy more units with the same amount when the price is down. As a result, DCA can decrease the total cost of the investment. Furthermore, the average per unit cost could be lower than the purchase price in the total investment.
Buying assets at $40 and selling at $28 eventually, does it gain or lose?
The scenario of regular contribution amount
With a $400 regular contribution every month, start buying assets at $40… 
| |
Total |
First month |
Second month |
Third month |
Fourth month |
Fifth month |
Sixth month |
| Contribution Amount |
2,400 |
400 |
400 |
400 |
400 |
400 |
400 |
| Asset Price |
|
40 |
32 |
25 |
16 |
20 |
32 |
| Buying Units |
96 |
10 |
12.5 |
16 |
25 |
20 |
12.5 |
👆You can scroll horizontally for smartphone users.
Total Contribution Amount ÷ Accumulated Units
$2,400 ÷ 96 = $25
Accumulated Units x (Asset Price － Average Costs) ÷ Total Contribution Amount
$96 x (28-25) ÷ $2,400 ＝ 12%
The scenario of regular fixed units
With a regular buying of 10 units every month...
| |
Total |
First month |
Second month |
Third month |
Fourth month |
Fifth month |
Sixth month |
| Contribution Amount |
1,650 |
400 |
320 |
250 |
160 |
200 |
320 |
| Asset Price |
|
40 |
32 |
25 |
16 |
20 |
32 |
| Buying Units |
60 |
10 |
10 |
10 |
10 |
10 |
10 |
👆You can scroll horizontally for smartphone users.
60 × (28-27.5) ÷ $1,650 = 1.8%
You can accumulate more units when the price goes down to reduce the cost. Therefore, if you keep buying regularly with a fixed amount, you can get a profit immediately and obviously as the price rises up.
No matter what kind of market fluctuations you encounter, you can get a positive return eventually.
Below is the performance of 3 assets, which one’s performance is better?
Contributes to the above 3 assets regularly with a fixed amount of $100 per month…
| |
Asset 1 |
Asset 2 |
Asset 3 |
| Total Contribution Amount |
2,500 |
2,500 |
2,500 |
| Accumulated Units |
148.23 |
298.14 |
92.39 |
| Average Costs |
16.87 |
8.39 |
27.06 |
| Returns |
42% |
67% |
33% |
The return of above Asset 2 is better than others. The key is the "DCA" strategy.
Regardless of market long or short position, investors had better keep purchasing separately and choosing stable investment portfolios to reduce the risk. Since the strength of DCA is that you can accumulate more units when the price is down, try to not fear when the bear market comes and avoid buying high and selling low. When the price rises, you can sell them out and get more profit easily.
Important Note:
The above information is for reference only and does not represent Metis Global Limited in providing any investment recommendation or offer. No liability in respect of any errors or omissions (including any third-party liability) is accepted by Metis Global Limited. No guarantee is given that the content of that information (including any such information) will be error-free. The information should not be relied on by anyone as investment advice. Please seek professional advice from your financial adviser.
