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New investors often ask how dollar-cost averaging benefits can help them grow their returns. 

A fundamental principle of investing, the dollar-cost averaging (DCA) strategy provides clear benefits for the cautious investor by reducing risks of market volatility through planned, periodic investments into their portfolio. 

In practice, through simple math, DCA allows investors to guarantee holding the average price of a share, which provides a lower-risk method for building returns when compared to trying to time the market. 

Invariably, however, this approach leaves the investor wondering when they should add new funds into the market to maximize dollar-cost averaging benefits. 

One typical question we commonly receive goes like this:

“Would you recommend injecting funds into my account regularly (monthly), or less frequently (quarterly or even twice a year)?” 

“Does the frequency of me injecting money impact my return?”  

The simple answer is: Yes. Frequency does impact returns. 

Yet, as is common with most ventures (business, investment or otherwise), there is a familiar reciprocality that determines your returns — the risk-reward profile.

While DCA offers a lower-risk method, it also generates lower rewards. 

In contrast, historically higher rewards with reciprocally higher risk for short-term investors are achieved through lump-sum investing, whereby the investor makes a large initial capital injection at once

For this reason, DCA is usually only practiced by very cautious, conservative investors that are testing the stock market for the first time. This is because new investors may experience losses in the short term, so they tend to get scared easily. However, over the long run, lump-sum investing always performs better.

That being said, by buying shares within a portfolio on a periodic basis (frequencies vary, as well see), the practitioner of dollar-cost averaging will obtain the average price, and can thus sweat market swings less.

Novice investors particularly favor the benefits of dollar-cost averaging because the method is simple, convenient, lower-risk in the short term and (perhaps most importantly) removes the danger of emotion from investing. 

In this article, we’ll review all of the dollar-cost averaging benefits that this strategy can provide the cautious investor profile. 

We’ll also explain alongside this why experts prefer lump-sum investing for growth-oriented portfolios.

Here is a list of topics related to learning about dollar-cost averaging benefits that you’ll find in this article. 

  1. What is dollar-cost averaging? 
  2. Why practice dollar-cost averaging? 
  3. How do investors calculate dollar-cost averaging? 
  4. What are the main dollar-cost averaging benefits? 
  5. How to take advantage of dollar-cost averaging benefits (and what growth investors use instead) 

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1. What is dollar-cost averaging?

Dollar-cost averaging is an investment strategy typically used by cautious investors to manage their investments by dividing up the total amount of a lump sum they have to invest, (they came to an inheritance, they received a bonus, they have a sum saved and are new to investing…) over a periodic schedule of purchases. 

As we all know, the stock market is unpredictable. From one day to the next, it can swing up or down. Dollar-cost averaging lessens the impact of these swings on your money in the short run.

To do this, dollar-cost averaging ensures that an investment portfolio includes the lowest possible amount of volatility. Volatility is the rate at which the price of an investment increases or decreases over time. The lower the volatility, the more stable the investment.  

2. Why practice dollar-cost averaging? 

It sounds complicated. But it’s actually very simple. 

In order to employ dollar-cost averaging, you put your money into the market in chunks overtime on a scheduled basis. It’s vital to be disciplined and stick to a schedule. 

If executed correctly, the average price that the investment manager paid for the entire holding – the dollar cost average – will be a good starting point for the investment. It won’t be too low but, importantly, it won’t be too high. It will be just right.

3. How do investors calculate dollar-cost averaging? 

dollar cost averaging benefits sarwa

Above is an example of how DCA works. However, let’s illustrate this calculation with another example below. 

Consider the following scenario: 

You want to buy shares from Company A. 

Today, Company A’s share price is $110. So you buy 3 shares today, spending $330. 

In one month’s time, Company A’s share price has fallen to $100. As per your investment schedule, you buy 3 more shares, spending $300. 

In two month’s time, Company A’s share price has fallen again to $90. As per your investment schedule, you buy 3 more shares, spending $270. 

You now own 9 shares in Company A and you’ve invested $900. The dollar cost average for each of your shares is $100 ($900/9 = $100). 

Looking at the investment timetable, if you had invested all $900 in month one, you’d only have been able to buy 8 shares as the price was higher. As you were disciplined and invested as per your schedule, dollar cost averaging meant that you got the best deal. 

By not investing all of your money on day one, you decrease the chance of overpaying. Over time, you get the average price – not a high price, not a low price. In investing, that’s good enough.

4. What are the main dollar-cost averaging benefits?

Here is a look at the main benefits of dollar-cost averaging.

1. Removal of risky ‘market timing’

By sticking to a schedule, dollar cost averaging removes the need to ‘time the market’. 

This is a huge saver of stress and money for first-time investors. Timing the market is notoriously difficult even for professional financial experts that dedicate their careers to analyzing share price values. 

Being frank: Even most of those experts perform poorly when they ‘time the market’.

The magic of simple math used in dollar-cost averaging ensures low-risk investments produce relative returns if the averaging is consistently practiced. Importantly, this also will help the new investor sleep at night. 

Warren Buffett’s mentor Benjamin Graham was a staunch advocate of the benefits of dollar-cost averaging for this reason. 

“Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions,” he said.  

In other words, for someone who is scared of entering the market all at once, it becomes easier to ignore the market if you continue to make consistent investments into it. If the market is up, stick to your scheduled investment. When the market crashes, stick to your scheduled investment. 

In the end, it’ll all average out. 

2. Disciplined investing habits

We live in a fast-paced world. And most of us do not have the financial market knowledge nor the extra time to professionally manage a personal investment fund. 

Can you imagine yourself building an ever-growing retirement fund that requires constant financial homework of securities valuations? Probably not.

As always, there are some sage Warren Buffett quotes to help instruct this point:  

“If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”

In this way, the benefit is clear: By practicing DCA, investors don’t have to overthink their investments and can establish a disciplined pattern for their wealth-building plan.

By sticking to a schedule, the market will do all the heavy lifting. 

3. Better manage emotions

The biggest culprit of stock market losses is our own emotions. 

Here, Benjamin Graham once again provides some axiomatic advice: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”

Seeing your money shrink is stressful. And when that stress hits, young investors tend to scream instead, run to their brokers and yell, ‘Sell!’ 

This is a recipe for ruin. 

The wisest thing an investor can do is to ignore short-term market volatility, and practicing dollar-cost averaging helps doing just that. 

If the investor sticks to a schedule, they’ll reduce myopic market panics by viewing the market through the lenses of a broader timeline. 

5. How to take advantage of dollar-cost averaging benefits (and what growth investors use instead)

Today’s advancements in financial technology have empowered investors to take advantage of the benefits of dollar-cost averaging in ways that the average investor couldn’t do just a decade ago. 

Sarwa was founded with the principal mission of providing wider access to this technology through a robo advisory platform, which allows for convenient automated investments that apply the principles of dollar-cost averaging. 

Yet, we understand that the benefits of dollar-cost averaging have their limits, which is why investors prefer lump-sum investing for growth portfolios that prioritize larger returns over reduced risk. 

Dr. Jiro Kondo, professor of finance at McGill University in Montreal, Canada, underscores that DCA shouldn’t be used by investors seeking to maximize returns. 

“DCA won’t enhance performance in our traditional metrics on average. In fact, it will lower your expected return, but also lower your risk, since you delay your entrance into financial markets,” Kondo says. 

Indeed, the only time that dollar-cost averaging has outperformed lump-sum investing has been during market crashes. This is simply because the DCA investor buys into a falling market, thus acquiring lower average share prices than the lump-sum investor would. But again, this is with a short term lense.

Overall, DCA is still an ideal strategy for new investors looking to get their feet wet.

“I think the behavioural benefits are important,” says Kondo. “DCA helps overcome emotional fear of diving into financial markets all at once and helps commit to making regular deposits into financial markets going forward.”

At Sarwa, this is why we profile each of our clients to determine which risk profile will best suit their goals. 

Furthermore, we’ve developed our automated investment technology so that investors can easily take advantage of dollar-cost averaging and/or lump-sum investing strategies. 

Today, all Sarwa account holders can easily benefit and apply these time-proven approaches thanks to emerging financial technology. 

Regardless of the strategy you ultimately choose, the best time to enter the market is always today. 

Contact us and get the conversation started. 

Want to know more, talk to our advisory team they will be happy to help. Ready to invest in your future?
Important Disclosure:

The information provided in this blog is for general informational purposes only. It should not be considered as a personalized investment advice as this might not be suitable for everyone. Each investor should do their due diligence before making any decision that may impact his/her financial situation and should have an investment strategy that reflects his risk profile and goals. All investing is subject to risk, including the possible loss of the money invested. Examples provided are for illustrative purposes. Past performance does not guarantee future results. Data shared from third parties is obtained from what are considered reliable sources however cannot be guaranteed.