Is Dollar Cost Averaging still the proven money making strategy for you?

You might be asking the question, "What's Dollar Cost Averaging?" Dollar Cost Averaging (DCA) is a technique of buying a fixed dollar amount of a particular investment on a regular basis, regardless of the share or unit price; thus purchasing more shares when prices are low, and fewer shares when prices are high. Over time, the average cost per share of the security will become smaller. This method attempts to lessen the risk of investing a large amount in a single investment at the wrong time.

Investing a large single amount of money at the wrong time is emotionally hard to deal with. Imagine investing your hard earned cash in an investment that lost 50% of its value within a week. Using Dollar Cost Averaging avoids this scenario by investing a small amount over time rather than taking a punt at getting your timing exactly right.

The fact is there is no one who can consistently time the market. Not even the professionals can time the market. Or should I say, in particular the professionals can't consistently time the market. Sure some investment managers have had some good runs but it is generally the case that this year's best performer will be next year's underperformer.

So is Dollar Cost Averaging still the proven money making strategy for you?

With the current Australian share market trading at less than 50% of its November 2007 peak, some in the finance industry are suggesting we throw out Dollar Cost Averaging and just get our money into the market at prices we have not seen for around 5 years.

Ditching Dollar Cost Averaging while the Australian share market and share markets around the world are trading at such massive discounts is a compelling case, particularly when you look at the returns achieved during the upward swing in the years following previous share market crashes over the past 40 years.

|PIC2|However, we don't know what the future holds. The market could fall further; it could stay low for a number of years. If you have some cash to invest you should seriously consider investing at least half of it now and then with the other half let the proven money making strategy of Dollar Cost Averaging do the work for you.

Gavin Martin is a Financial Adviser, Managing Director of Cornerstone Wealth and founder of www.mastermymoney.com.au

Disclaimer

This article does not take into account the personal objectives, financial situation or needs of any person. You should consider the appropriateness of the information having regard to your own objectives, financial situation and needs and obtain professional financial advice prior to making any decision.