Allocate Your Portfolio By Using The Dollar Cost Averaging Strategy

Aside from value cost averaging strategy, one of the most common strategies that

investors use to maintain their profitable investment portfolios is the dollar cost averaging strategy. This strategy, which is also known as constant dollar plan, is widely used by different investors and traders all over the world because of its simplicity and effectiveness. Investors who use the dollar cost averaging strategy usually set aside a fixed level of money to purchase shares of stocks in a particular company. Through this strategy, investors can buy more shares from the company when share prices are cheap and lesser shares when the price is higher.

Because of the pattern of share acquisition using this strategy, investors often accumulate lower overall price for all the shares they have acquired. Dollar cost averaging strategy is commonly used by long-term investors rather than daily traders who use the value cost averaging strategy. Investors who opt to use this strategy should be committed in making their regular acquisition of the shares of stocks.

For this strategy to be successful, investors should not be deterred in buying shares even if the price varies during a specific period of time. Even though there will be fluctuations in the share price, this would even out in the long run if the investors would regularly purchase the shares of stocks. Eventually, the average price of the previously purchased shares shall reach the current fair value of the shares at each interval.

Investors who opt to use the dollar cost averaging strategy should follow the following procedures. First, investors should decide on how much they can regularly invest during the extended period of time. This is essential since constant investment is the key to the success of this strategy. Investors should also take into consideration if they can still generate the same amount of money in the future.

Next, investors should carefully select which company they want to invest to. Since investors will put all their money in this company in the long-run, they should choose a company which has good financial performance and does not have any going concern issue. Investors should check and analyze the financial statements and current conditions of the companies in order to evaluate which is a good investment. Investors can opt to combine the use of the dollar cost averaging strategy with index funds in order to mitigate potential risks.

Lastly, investors should then choose an interval which they are comfortable investing with. This interval should be carefully decided upon since it will be followed in the long run. They should determine whether they would invest weekly, monthly, quarterly or annual. Among these alternatives, it is recommended to select longer intervals because they incur lesser transaction fees. Longer intervals also allow investors to obtain larger number of stocks in each purchase.

Like value cost averaging strategy, there are drawbacks with the dollar cost averaging strategy. Although it mitigates the difference between the average share value and its current fair value, this strategy does not ensure that any loss will not incur. Further, using this strategy will cause losses to accumulate if the share price continues to go down in the future.

by: William WL Tan

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