Dollar cost averaging involves investing a dollar amount on a regular basis no matter the state of the market. DCA allows the investor to separate investing from their emotions. Investors can avoid their psychological bias and stay away from the fear and greed that comes with investing.
In this method a long term investor can take advantage of a bear market and see it as an advantage to buy more shares. DCA helps the investor by allowing the investor to purchase a greater amount of shares when there is a correction in the market and a smaller amount of shares when the market is high.
The approach is consistent and can help the investor meet their long term financial goals. This method typically results in a lower average cost compared to a lump sum purchase of shares. Lump sum investing is when an investor puts all of their money available at one time. Lump sum investing can result in higher returns if invested at the right time within the market. History favors lump sum investing in terms of profit two thirds of the time. DCA on the other hand has proven superior in avoiding losses. Due to these reasons a person should have a good understanding of their risk tolerance before choosing a method of investment. Find out more about risk tolerance on our Instagram @therichcollegestudent. DCA is not appropriate for everyone but it is appropriate for those who want to invest in individual stocks and wish or need to invest regularly over time. It can help the investor avoid mistiming the market and investing all of their money at a market high.