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All about Dollar Cost Averaging (DCA)

Written by Singlife | 18 Nov 2020 |

Broadly speaking, there are 2 types of investing: systematic and non-systematic.

Systematic investing is a methodical approach and does not rely on one’s emotions or gut feelings. You set aside a fixed amount every month, regardless of market trends and the price of units. If the price of the units goes down, you buy more units; if it goes up, you buy fewer units.

This approach is called ‘Dollar Cost Averaging’ (DCA). It is a strategy of investing a fixed amount on a regular schedule. DCA replaces market speculation with a systematic investment approach and could smooth the average unit cost over time. This is shown using the infographic as an example. The number of units you can purchase with $100 every month will differ based on market conditions. With DCA, the average unit cost is $2.40, lower than the cost ($5) if you had decided to invest one lump sum in Month 1.

Some may argue that in a period where the market is trending upwards, your portfolio may not perform as well as if you had simply invested a lump sum earlier.

However, DCA is a much more disciplined way of investing, allowing you to avoid investing all your money during “unlucky” market timings. Rather, spacing out your investments with regular, smaller top-ups. Ultimately, the choice is yours- systematic or non-systematic.

You can check out the example below or click here to see: