Dollar Cost Averaging Revisited

Einstein, among others, has been credited with commenting on the “magic” of compounding and one of the ways this can be captured in the investment world is to take part in the dividend reinvestment plan which is offered by a significant number of companies listed on stock exchanges, including the ASX.

Hand in glove with this magic is the system of dollar cost averaging which in the past I have described as a foolproof method of investing.

If you invest the same amount of money on a regular basis – weekly or monthly depending on your income source – you will buy smaller numbers of shares or units when the price is up and scoop up more when they are cheaper. This is a bit like buying cheaper fruit when it’s in season. Unlike strawberries, which are cheaper in August but don’t keep very well, the time to buy is immaterial.

As long as this is applied to a bundle of investments listed on a stock market or managed funds (mutual funds), the system recognizes and takes advantage of the fact that prices inevitably vary.

Just like fruit!