Dollar Cost Averaging Explained in Under 3 Minutes

So dollar cost averaging or you might have heard it being referred to as DCA is one of the simplest yet most powerful investment strategies out there. If you're sat there and you've ever wondered how to start investing without the stress of trying to time the market perfectly, which of course no one can do, then dollar cost averaging is probably going to be a great option for you. In terms of how does it work, well really it couldn't actually be more simple. Basically all dollar cost averaging is is when you invest a fixed amount of money in the stock market at regular intervals regardless of the price of the asset with the main goal of reducing market volatility by buying more shares when prices are lower and fewer shares when prices are higher. Let's take a look at an example of it in action versus investing everything in one go. We have a stock here with an initial cost of $10 a share and we have $800 to invest. To the left we have two different investment strategies. We could either invest all of our $800 at once for the price of $10 a share or we could spread that investment out over eight months, let's say investing $100 a month. So starting off with the lump sum and all at once option, if we invest all $800 at once and eight months later the stock price is still $10, we haven't made or lost any of our money on our initial investment despite the stock price fluctuating over time. Essentially our percentage return would be zero and we'd be walking away with exactly what we put in. However let's now say we went with the dollar cost averaging route and only invested $100 at $10 per share initially then of course as you can see when the stock price went up to $20 we invested another $100 so of course we're going to get fewer shares for our money but then when the stock price dropped to $7 a share we did exactly the same so we got more shares this time for our money and just repeated that for the next six or seven months at different prices. I'm sure you get the point. Come to the end of the eight months as we were able to get more shares for cheaper we were able to bring our average price per share down to around $8 meaning that within the same time frame with the same amount of money invested overall we actually ended up making a 20% return on our investment. So knowing this the benefits that dollar cost averaging can actually be really good not only can it produce better results with your investment but it will also reduce emotional investing by taking out that guesswork it's also going to reduce risk because you're not putting all of your money in at a single potentially bad moment and finally and probably the best one of them all by investing consistently your investments will compound over time which is a habit that can lead to really good long-term growth. But essentially that is dollar cost averaging in as simple words as I can put. I hope you found this video useful leave a like if you did and I will see you in the next one.