The Genius of Dollar Cost Averaging

“The share market transfers wealth from the impatient to the patient….” Warren Buffet – arguably the worlds leading share market investor.

Most of us are influenced by our hearts rather than our heads when it comes to making investment decisions and become nervous when share markets fall. Sentiment is a powerful force that swings relentlessly between fear of missing out when markets rise and fear of losing when markets fall.

After strong rises in equity markets it is easy to lose sight of the fact that markets have and always will have periods of volatility and negative returns on a regular basis. Share Market volatility is not new, and not unexpected.

So how does the average investor overcome this problem of dealing with volatile markets that result from uncontrolled emotion and sentiment? Answer – Dollar Cost Averaging – which is simply investing equal dollar amounts at regular intervals. This approach imposes a discipline that dispenses with the need to worry about market uncertainty and volatility.

Using the genius of Dollar Cost Averaging, and investor goes into the market and buys bucket loads of shares/units when prices are low, and thimble fulls when prices are high.

This results in automatically buying more when prices are low. In a volatile market, this means that your overall cost is averaged between the highs and the lows.

And, as we know that the long term direction of the market is up, averaging your cost down using Dollar Cost Averaging means you will make a profit.

All this without having to think about when is the right time to buy!

Stick to a strategy and avoid knee jerk reactions to short term market movements. That is, don’t try to second-guess where markets are heading. Acting on fear and greed impulses can result in buying at the top and selling at the bottom, with sometimes disastrous results on an investment portfolio.