Investing – What Is Dollar Cost Averaging?

Buying stocks low and selling high is simple investment advice but it is much easier said than done!

Financial markets are inherently unpredictable and it is impossible to consistently choose the best time to buy or sell.

Dollar Cost Averaging (DCA) is where an investor invests a fixed dollar amount in his or her favourite mutual funds every single month.

You won’t invest everything at the best time, or the worst time. When the fund’s price declines, the investor receives more shares for the fixed investment amount, and fewer shares when the share price is up. This strategy results in lowering the average cost.

Dollar-cost averaging is a convenient, systematic way to build a significant investment portfolio. One that reduces your risk and helps you build your investment over the long-term.

It does not eliminate all the risks of investing in financial markets, there is no method of investment that can guarantee a profit if you decide to sell at the bottom of the market. But a steady, patient DCA investor reduces the effects of market risk by acquiring more shares at various prices.

DCA is particularly well suited to well diversified, ‘blue-chip’ growth mutual funds whose prices have moved steadily higher over the long term. DCA encourages discipline in your investments because once you have begun, it serves as a strong reminder to invest every single month at the appointed time.

With regular investments DCA eliminates the need to decide when to invest, you do so every month, regardless of what is going on in the market. DCA also avoids the temptation to time the market, some investors cannot resist the urge to try to invest at what they think is the market low and take their profits at a market high. They usually fail because the task is virtually impossible, even for the experts.

A market decline which we’ve experienced for a few years now can mean bargain prices. Unless you are selling shares, a fund’s price quote in the daily paper is not relevant for anyone who is not planning to sell, so don’t panic if it is down!

In fact, a downturn provides the opportunity to buy more shares at attractive prices, shares that have the potential to grow in value when the market finally turns upward. Over the long-term, it makes little difference whether the market was up or down when you began.

Keep in mind that in order for dollar-cost averaging to work, you must be prepared to commit the financial resources and have the resolve to make the contributions every single month.

Be prepared to weather a sustained market decline, market declines are a normal part of the stock market cycle, they must be expected. However history has shown us that the market advance is permanent, the decline is invariably temporary.

If you would like to see more about the offshore investment book written by Scott Oliver please visit Costa Rica’s Guide To Making Money Offshore or, if you would prefer to read a client’s letter please see Costa Rica Investing in Offshore Funds.

This offshore investment book and the offshore strategies implemented are available to non-US citizens/residents and non-Canadian residents only. Canadians legally resident in Costa Rica and other nationalities may apply. Or, please feel free to contact us here

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Andrew Makarik

to@welovecostarica.com

Andrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.