Smoothing market ups and downs
Buy more for less, with dollar cost averaging

You may already know that a regular investment plan is a proven strategy to accumulate wealth over time. But did you know that it could also help you buy more units in your chosen investment for less money, especially in volatile markets?

The secret is something called dollar cost averaging.

It works like this: each month, you invest the same amount in your investment, regardless of what's happening in the market. Over time, the value of your investments will go up and down in step with market movements. So, while you'll get fewer units for your money when the market's up, you'll also enjoy some bargains when it's down.

The result is that you end up buying more units when they're cheaper, and fewer when they're more expensive. Overall, your average entry price over time will be lower. As long as the market doesn't simply rise or fall, you'll eventually come out ahead, without having to try and time the market.

Dollar cost averaging in action: investing $250 a month

Month Investment Unit price Units bought
1 $250 $1.00 250
2 $250 $0.90 278
3 $250 $0.80 313
4 $250 $0.90 278
5 $250 $1.00 250
6 $250 $1.20 208
Total cost $1,500
Current value $1,891
Average unit price $0.97

Making volatility work for you

Dollar cost averaging is a great way to smooth out investment returns and make volatility work for you, without trying to second guess future market fluctuations, which is also known as timing the market. But it isn't foolproof. In particular, there are two situations where dollar cost averaging may not help:

  1. When the trend of the market is sharply up or
  2. The market is trending sharply down.

However, when the market is trading sideways, as it has been for much of the time since the global financial crisis, then dollar cost averaging can work in your favour.

Next steps

  1. Learn about the power of compounding returns.
  2. Work out your risk profile.