Dollar Cost Averaging is a trading strategy; an investor has an amount each month which he uses to invest in.
The strategy is that he invests the same among each month even if the price goes up or down over a fixed time period.
An example
An example is an investor; he has 100 dollars which he is allowed to invest each month in stocks the next three months.
The first month is the stock price 10 dollars; he buys 10 units of the stock; the next month is the price 5 dollars; even as the price is lower he buys the stock; as the price is lower he buys 20 units; the next month has the price risen to 7,5 dollars and he buys 13,33 units.
What is the investment capital in month four?
In month four is the amount of units 43,33; the investor bought at different prices in the last three months; he has invested 300 dollars.
If he had bought the stocks the first month to 10 dollars he would have bought 30 units; if the price in month four has fallen to 6,8 dollars his investment capital would have been 204 dollars (6,8 times 30 units); he would have had a loss of 96 dollars.
Instead he brought the stock units at different price levels; if the price is 6,8 dollars a unit in month four his investment capital in month four is 301 dollar (6,8 times 43,33 units). His investment has made him a 1 dollar profit.
If the price instead had raised to 8 dollars his investment capital would have been 346 dollars (8 times 43,33 units) and he would have made a profit of 46 dollars. If he had brought the units at 10 dollars the first month he would have had a loss of 60 dollars as his investment capital would have been 240 dollars (8 times 30 units)
In the video I found on YouTube is a woman explaining the Dollar Cost Averaging strategy with an example.
The video is available at this link as it was not possible to embed the video in this post.
Is dollar cost averaging a good idea?
If the market is in a downtrend the dollar cost averaging could be a good idea as the example above shows; but if the market is in an uptrend is the strategy not the best investment comparing to investing all at one time as the price is rising.
I found an article on the internet with the title “Is Dollar-Cost Averaging Dumb?”; in the article is a research of what is best; invest all at one time or invest over a time period (Dollar Cost Averaging); the research showed that is was better to invest all at one time; the cause is that prices has been rising over time.
“Is Dollar-Cost Averaging Dumb?” (The article) is on this link.
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