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Tuesday, May 18, 2010

Dollar Cost Averaging - it's a mouthful, but it's easy and it works!

I get why it’s called “dollar cost averaging”, but really, this very simple investment strategy is quite the mouthful. Mind you, my suggested alternative of “investing a bit at a time to take advantage of all the ups and downs” is a tad wordy.

If you’ve been following my blog (and let’s face it, why wouldn’t you? tee hee), then you’ll know that the major sharemarkets are crazy volatile at the moment. So does that mean you shouldn’t be investing? Not at all, but it does mean that you should look for a strategy that actually takes advantage of the “ups” and “downs”.

This strategy is often referred to as Dollar Cost Averaging because it allows you to average the purchase price of your investment over time.

Rather than trying to pick the right time to invest, you are continually adding to your investment and therefore avoiding the risk of entering the market at the wrong time in the investment cycle. Imagine if you had invested a significant lump sum of money yesterday when the market lost a whopping 3%?

When investing regularly over the longer term it usually doesn't matter if the market fluctuates. In fact, you can benefit from the downward movements by buying investments at a “discount” and this lowers the average cost of your units or shares. For example, if you’d invested in an All Ordinaries index fund yesterday, you would have bought your units at a 3% discount!!

Talk soon,