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Dollar Cost Averaging: What You Need to Know

21 March 2018

ABC Bullion Dollar Cost Averaging Chart

What is dollar cost averaging?

Dollar cost averaging is an investment strategy wherein investors purchase a predetermined fixed-dollar amount of assets at regularly scheduled intervals regardless of the price of the asset at the time of the trade. An example of dollar cost averaging would be for an investor to buy $5,000 worth of gold every quarter rather than a lump sum of $20,000 worth of gold for the year. Note that the investor chooses a fixed dollar amount, $5,000 per quarter, not a fixed amount of gold, say 500 grams.
 

"Time in the market is more important than timing the market."

Experienced investors, who are aware of the positive role that dollar cost averaging can play in generating strong long term return know the above saying well. There are many successful proponents, such as Warren Buffet, who adhere to the adage, believing that dollar cost averaging and keeping your money invested in the market for a long time is the best way to compound wealth over the long run.
 
Unfortunately, some investors attempt to time the market, rather than dollar cost average, based on their predictions about where the market is heading in the short-term, whilst forgetting about the long term reasons for investing in their chosen asset class.
 
These principles apply to all asset classes, including physical gold and silver.
 
Generally the longer you stay in the market, the better your investment return will become. The more savvy investors will often prefer to dollar cost average into the market instead of thinking they know what the future holds short-term, and having a specific price in mind which they will buy at.
 
The reason for this is that dollar cost averaging often leads to better long-term returns, rather than missing out on market gains because as an investor you get too cute trying to time the market, and end up missing out on investing all together.
 

A dollar cost averaging example using gold

Let’s look at a hypothetical example that is unfortunately all too common. An investor in mid 2006 may have put off their gold investment in the hope of the price hitting a psychological attractive level of $700 AUD per ounce. Instead, the gold price bottomed out just above that level and more than doubled in the years to come.
 
Whilst the market timer waiting for AUD $700 per ounce would never have invested anything, those who choose to dollar cost average, and are aware of the “time in the market” saying, would have been investing along the way, benefitting from the rise in the price of gold over this entire time period.
 

Your personal dollar cost averaging plan

The bottom line is that exposure is far more important than timing, and dollar cost averaging can be an effective tool in reducing the effect of short term luck on your overall investment performance. Of course, many people still want to compare dollar cost averaging vs lump sum investments, so it’s important to remember that scheduled intervals for investments are the key to dollar cost averaging. Lump sum investments do not provide the benefits of minimising market-timing risks the way dollar cost averaging does.
 
If you’re considering applying a dollar cost averaging investment strategy to your gold purchase, you’d want to be making 4-5 $10,000 investments over a certain period of time rather than one lump sum investment of $50,000.
 
If you’d like to speak to one of our gold experts about dollar cost averaging and gold, call 1300 361 261. Because at the end of the day, it’s like the old saying goes: you’ve got to be in it to win it.