DOLLAR COST AVERAGING

By investing smaller amounts on a regular basis (monthly), you may reduce your exposure to market risk, market timing risk and volatility in general. In fact, by making regular monthly investments, you can turn market downturns to your advantage. This process is called Dollar Cost Averaging.

If we concede that investment markets move upward over the long term, regardless of short term fluctuations, Dollar Cost Averaging makes market downturns advantageous. When there is a temporary downturn in the market, or price of a security, it can be considered that that market or security is at a discount, because we have conceded that it will rise again in the future.

Because the price is lower, and the same amount is being invested, an investor will get more units of the investment for the same investment amount. Because the investor now has more units, their return can be multiplied as investment growth and income occurs on a ‘per unit’ basis, rather than a ‘per $ invested’ basis.

Consider the following example:

Period	Amount Invested	Price Per Cow	Cows Bought
1	$100	$100
2	$100	$50
3	$100	$50
4	$100	$25
5	$100	$20
6	$100	$10
7	$100	$20
8	$100	$25
9	$100	$50
10	$100	$100
Totals	$1,000	n/a	36

The value of the ‘herd’ is now 36 x $100 = $3,600.

If the ‘grazier’ had made a one-off investment of $1,000 in period one, they would only own 10 head of cattle, which would mean the total value of the herd would be $1,000.

This is how you can use Dollar Cost Averaging to reduce the risk of making a poorly timed investment and use market downturns to profit.