Dollar cost averaging

Dollar cost averaging is a principle that applies to investments made on a regular basis. It is a simple idea that gives surprisingly successful results.

Investing the same amount of money each month over a long period of time, irrespective of price fluctuations, your units will be purchased at an actual cost which is usually lower than the average cost over the period. The reason this happens is that when unit prices are going through a downturn, more units are acquired for the same outlay.

Assume $200 is invested each months for six months. The unit price starts at $1, and then falls progressively for three months to $0.60c (a 40% decline) then rises back to the original price of $1.

The total outlay of $1,000 has purchased 1,233 Units.

These units are now worth $1,233

The units were purchased for an average price of .81c each yet they are now worth $1 each! This means that the return on your investment has been 23% over the six months - and all this at a time when the unit price actually slumped by 40% and only recovered back to where it started!

DISCLAIMER
The content of this article contains general securities advice only, which is not intended for any particular client. In preparing the content, Ethical Investment Services Pty Ltd has not taken into account any particular customer's investment objectives, financial situation or particular needs. Accordingly, before acting on any advice contained in the content, you should contact your financial adviser to consider whether the advice is appropriate in light of your particular investment needs and circumstances.