A common question that comes up among investors is whether it is better to save up large sums of cash and then invest it all at once, or invest small amounts regularly.
Dollar Cost Averaging (DCA) refers to the practice of investing a fixed amount at defined intervals (often monthly) into a fund or portfolio of funds. By investing this way more units are purchased as prices drop and fewer units are purchased as prices rise. Investors use DCA to guard against the market dropping shortly after investing a lump sum.
By investing regularly, investors are able to put their assets to work as quickly as possible. Intelligent investors know that time is a key element in securing their financial futures. The faster they put their assets to work, the more money they will have available when it is time to reap their rewards.
Let’s examine this principal with some numbers. If you were to invest $6000 at the end of the year, at an average return of 12% it would be worth about $1,448,000 thirty years from now. Alternatively, if you were to invest the same total amount as $500 per month instead, it would add up to $1,747,000 over the same thirty years. That’s almost $300,000 extra in your pocket come retirement. Putting your money to work as fast as possible really adds up over time!
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