Dollar cost averaging is a smart investment technique used to passively invest into the market for the long term.
One of the major pitfalls a lot of investors may succumb to is allowing the power of their emotions influence their investment decisions. This causes people to:
- Buy when the prices are high, due to optimism of a rising market
- Sell where the prices are low, due to fear of a falling market
Without a set structure, or strategy to follow, we are vulnerable to the shortcomings of our human nature to act based on fear. That’s were dollar-cost averaging as an investment technique comes in handy.
Dollar cost averaging is a strategy whereby the individual invests into the stock market on regular intervals, despite the performance of the market at the time of investment. For e.g. investing $1000 into the S&P500 every month when paid.
A benefit to this is that it removes the factor of fear of trying to ‘time the market’, and it also diversifies your risk across time (as opposed to a large lump sum investment into the market at one time). The market will always be volatile and experience its ups and downs, however the general trajectory of the market since the beginning of time has always been up, despite any recessions or any major hits the market has taken.
The investment vehicle which I have chosen for dollar-cost averaging is Vanguard’s ETF: VAS. VAS tracks the return of the S&P/ASX 300 Index. I’ve chosen this index because it consists of the top 300 Australian companies listed on the stock exchange in Australia. The ASX300 is diversified with many sectors which is favourable, as a diversified portfolio is a rule of thumb to be followed for every investor.
The frequency by which I choose to invest, and the amount I will invest … I haven’t figured out yet. But I’ve managed to create my own Vanguard account for now, which is good.
One thing I did notice though was that there are Vanguard ETFs for the American stock exchange which track indexes such as the DOW. However, unfortunately I came to find that these do not seem to be available through my AU Vanguard account, and can only be purchased through another broker. I planned to dollar cost average into the American stock market at a regular basis also, but this may now depend on the fees which I will incur to purchase these Vanguard ETFs through another broker. Maybe I will just have to change my frequency of investing into these ETFs… or maybe it won’t be worth it – maybe Australian indexes will suffice. I’ll have to weigh out my options and see.
Till next time!
