Dollar
Cost
Averaging
Buying low and selling high, is probably the most true, and simultaneously the most difficult thing to do while investing. To time the market right, especially at every time is nearly impossible however. Especially when emotions start to take over from the common sense, it becomes easy to overreact to the market and do the exact opposite of what is desirable.
Dollar Cost Averaging (DCA) is a technique that partially mitigates both the timing aspect and the emotions out of an investment decision process. DCA implies that an investor invests a fixed amount of money (i.e. €100) every given time period (i.e. every month). Now that the amount of money is fixed, and the timeframe recurring, the investor will automatically buy more assets when the asset is priced cheaply, and less when the asset is priced expensively. This technique also mitigates the emotional factor out of the decision.
DCA is an optimal strategy when you want to build up your wealth steadily (like for retirement or a big purchase), or enter the markets steadily instead of a one-off lump sum investment. It is ideal for saving purposes deriving money from a recurring income like a salary because it is meant to set aside a (small) amount of money every month.
In the example below, an investor puts away €100 every month into an investment fund. Note the monthly increases of €100 and the in-between fluctuations of the investment.
