What is dollar-cost averaging, and should you use it?

Published on: February 3rd, 2022

Put simply, dollar-cost averaging is an investing term that describes the strategy of making incremental investments over time rather than investing all at once in a lump sum. The idea behind it is that you can reduce the impact of market volatility by investing over a longer period. It’s essentially what happens with your superannuation. You, or your employer, make contributions over time, which are invested incrementally.

But is it a good strategy for investors?

Often, it’s an emotional decision rather than a financial one. Timing the markets is tricky, and even experts can get it wrong, so it can feel safer to invest in an asset over time, meaning you get the market average. For example, if you invest $100,000 today and the share price drops 20% tomorrow, it can feel like you’ve lost $20,000 before you’ve even started. But it’s important to remember that investing is a long-term activity, and a little patience can go a long way. Today’s price isn’t necessarily or even likely to be where you will end up over time. If you are looking for short-term gains, you’re speculating not investing, which is a different game altogether.

It can help to manage risk in some circumstances

Dollar-cost averaging can be a suitable strategy when you need to minimise risk, for example, in the latter years of your working life when you don’t have time to recoup losses. Or if you are investing an unexpected windfall, such as an inheritance. It can also be a suitable strategy for first-time investors or those with a low appetite for risk, but it’s unlikely you’ll outperform the market.

Additionally, it involves time out of the market and typically, research shows that lump sum investing yields better long-term results. This is particularly true in today’s low-interest environment, where money in the bank generates little in the way of returns.

Time in the market, not timing the market

If you are looking to invest long-term, the metric you should be looking at is your time in the market, not trying to time the market. If you have the time to weather market movements before you need access to the funds, you’ll most likely yield better results over time with a lump sum strategy.

However, it’s important to remember that the best investment strategy for you depends on your circumstances and your goals, which are different for everyone. That’s why working with an adviser is essential – they take the time to understand your personal context to help you make the right decision.

Apt Wealth advisers work closely with our expert inhouse Investment Team, giving you access to personalised advice backed by local and international market research. If you are considering your investment strategy, get in touch with an Apt Adviser to ensure you make the best possible move.

General Advice warning

The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommend that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.