Dollar Cost Averaging: Advantages and Disadvantages

 

You explained how I can always make money using Dollar Cost Averaging. Does it have any other advantages?

Apart from providing consistent returns, the biggest advantage of Dollar Cost Averaging is to remove the emotion and anxiety from investing – you invest a fixed sum at a fixed time, without worrying about whether the market is going up or down.

Normally, when a stock’s price is going down, people avoid buying the stock thinking it is not performing well. But with Dollar Cost Averaging, you would continue to buy the stock even while its price is going down – and why not? You’re getting the stock at a discount! Wouldn’t you be happy buying your favorite pair of shoes at a discount?

Are there any disadvantages of Dollar Cost Averaging?

A perfectly executed strategy of buying at the lowest price and selling at the highest price can theoretically give a better return – something Dollar Cost Averaging can’t. However, this is not a real disadvantage because it’s impossible to time the market consistently.

Do I need to remember to invest the amount every month? That’s sounds hard!­­­

No, most brokerages can help you automate this process – you just need to tell them how much money to invest, where, and how often, and they would take care of investing the money on your behalf – and if you are investing through a 401k plan, then you are already taking advantage of the Dollar Cost Averaging strategy!

Note: Dollar Cost Averaging is also known as Constant Dollar Plan.

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