Market Talk: The Magic of Dollar Cost Averaging

One may wait until a lump sum has been saved before making an investment. However, if we want to construct a sturdy building, do we lay an entire wall at a time or do we regularly stack bricks that eventually create a wall? We understand that a firm structure is built one brick at a time and the same can be said for a solid portfolio. The practice of ‘laying bricks’ or investing modest, fixed amounts consistently is known as ‘dollar cost averaging’. ‘Dollar cost averaging’ can be investing J$5,000 per week or J$20,000 per month for example, depending on one’s personal situation and financial goals. This simple change can make a noticeable difference in long term returns.

Example

For instance, what if one invested J$100,000 once per year for 5 years versus investing J$25,000 once per quarter, both at an annual rate of 30%? At the end of 1 year, the difference ‘dollar cost averaging’ makes would be J$14,438 and at the end of 5 years, the difference would be J$101,827.78.

Please note the stated 30% return is only for explanation purposes and not a promised rate of return. For this model we assumed that it took three quarters to save J$100,000.

‘Dollar cost averaging’ also fits neatly into a person’s lifestyle, creates a habit and can become a part of a personal budget. If investing is treated as a monthly obligation, like the bills or groceries then things that are out of reach today can become a reality in the future. Please speak with a licensed professional before participating in an investment vehicle.