Thoughts on Dollar-Cost Averaging

Same amount, different amount of shares

(Image source: http://www.wealth.newwealthadvisors.net/Knowledge-Center/Thought-Leadership/2013/Handling-Market-Volatility)

Just sharing some of my thoughts on monthly investment plans, only example I can think of is the one offered by Maybank Kim Eng, but you can search through the web to find if there are any others. Anyway, that's not the main point of this blog post, the focus of it will be on: Should people invest money in the stock market or bonds at regular intervals (months)?


Putting money away in the stock market at regular intervals like in a monthly investment plan is called dollar-cost averaging. This requires you to invest in the investment of choice at regular intervals regardless of sky-high prices or rock-bottom ones. This is, if carried out with discipline, will ensure that you would get a somewhat average value for the price you paid for the investment, after averaging out the costs of each share.

This idea works well for people who would like a less risky approach to investing. Coupled with diversification in different types of investments (bonds, stocks), this approach is relatively safe and would allow for decent returns on investment over the long run.

However, for those who would like to grow their returns even more, they can skip just the sky-high part of the prices and buy at the low, rock-bottom end. Following Benjamin Graham's analogy of Mr. Market, sell to the market when prices are higher than what you think the stock is worth and buy when it is lower. But of course, it would be good to keep some spare cash should the stock fall further and fundamentals are still sound, which can be used to buy up more shares in the company

I personally prefer the idea of the Mr. Market analogy. The stock market can be overvalued for a long period of time during the Japanese asset price bubble. Buying at inflated prices averaged out is still inflated and can lead one to lose out on good returns that the stock market can provide when stocks are purchased at reasonable prices.

However, there still is a place for dollar-cost averaging. For the uninformed investor that would like to have a share in the returns that the Singapore economy can and has provided, dollar-cost averaging takes up little time and is able to return a decent, albeit not extraordinary, return on investment, ideal for the working man who is constantly busy with his/her job. Being able to pick out the sky-high and rock-bottom prices of the market would take a fair bit of learning and experimenting, which may not fit into everyone's schedule.

To conclude, dollar-cost averaging does have some benefits, but like following the Mr. Market analogy, there is still risk in following it. I guess it depends on different people as to their investing style and the amount of time that they can devote to investing.

If you have enjoyed this post and would like to receive notifications on new posts, please subscribe to my blog via email