Monday • May 2, 2011 • by marco
I am not going to discuss the basics of Dollar Cost Averaging, I believe readers can find out about the concept quite easily on the Internet. Just going to display some interesting facts and graphs.
In the U.K., it is known as “pound-cost averaging”. I wonder if it is known as Ringgit Cost Averaging or Yuan Cost averaging in Malaysia and China respectively.
Dollar Cost Averaging works in reverse when you retire anyway. You might put $3,000 per month into stocks when you’re in the wealth accumulation stage of your life, you’re going to withdraw, say, $10,000 per month from your portfolio when you retire. And yes, that means you will be selling more shares when they are cheap and fewer when they are expensive — just the opposite of the supposed benefits dollar-cost averaging gave you when you started!
Dollar Cost Averaging has an important role psychologically. It is proven that Humans fear losses more than they love gains. Spreading out the short-term exposure to any day’s price is good for emotions. If you invested all $100,000 in a lump sum and the market dropped 5% the next day, you’d leave with an emotional scar. But alternately, if you began a DCA strategy and the market rocketed 5% the next day, you wouldn’t be nearly as sad.
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