What is Dollar Cost Average and Why it is Important?
After the existent of the internet, it is not difficult to invest in different types of Stocks, Bonds, Commodities, and Crypto assets. The Internet made it very easy to find good investment options around the globe.
When it comes to investing your hard-earned money to gain some profit on it we have to make a full-fledged plan so we don't have to regret it in the end. Dollar-Cost Averaging is one of the famous investing strategy among the investor. It helps to reduce shorter volatilities in the market and helps the investor to grow their portfolio. Let's know about it in depth.
What Is Dollar-Cost Averaging?
There are lots of investing strategies available in the investing world. Dollar-Cost Averaging is one of the famous and popular investing technic in this market. While using this strategy an investor divides his Investing money into different parts and use it to invest in a particular asset. In this strategy, the Investor uses a small amount to invest and consistently does it for a longer time frame. Dollar-Cost Averaging helps to reduce short-term market volatilities and give good profit in long run.
Why It Is Important?
Dollar-Cost Averaging has an important role in the field of investing. It helps Investors to avoid shorter time frame crashes and volatilities and protect them from taking huge losses. DCA help the investor to accumulate more unit in lower price. we can understand DCA importance through a case study.
Case Study
Suppose there are two investors A and B. Both have a fund of 1200$ to invest. A chose Lump-sum method and B Chose Dollar-cost Averaging Method. we can see their accumulation and profit earned over the period in the below table.
Investor - A
Investor - B
In the above case, you can see Investor A uses DCA to invest his amount and dived 1200$ into 6 equal installments and consistently invest for the period of six months. During the period of market fluctuation, DCA helps him to acquire more units. At the end of the six months, he has 268.56 units. If the current value of the unit is 7$ then the total value of A's port is 1879.92$.
Investor B put all the money in a single go at a current price of 5$ and acquire 240 units. After six months he if the price of the unit is 7$ then he has 1680$ in his portfolio.
If we compare A and B's portfolios we can see the difference.
A have more profit than B
So Dollar-Cost average help investor to accumulate more unit in a bear market and save from making huge losses. DCA result good profit in long run.
Thanks for reading
