It is funny that some people actually say that the “dollar cost averaging technique” (also known as DCA) is a stupid method. They start “giving up” using this technique especially when they make a lost in investing in Unit Trust or Mutual Funds.
“Dollar cost averaging is stupid! It doesn’t work and so far I have made a lost -30% out of my unit trust investment. What the heck? I should buy low and sell high, that’s the perfect technique!”I used to heard of this kind of statement and RECENTLY getting more and more due to fact that the recent economy recession caused by the subprime crisis that most unit trust or mutual fund make a lost around -20% to -30%. More and more people start complaining about this “Dollar Cost Averaging” method is stupid and they regret to follow this technique which they used to believe that it is 100% guaranteed method as told by their agents. 100% guaranteed? Who told you that?
Technically dollar cost averaging is NOT stupid but it was designed for STUPID people if you insist me to use the “stupid” word. So if you think you’re not stupid – know exactly when to sell high and buy low, don’t use Dollar Cost Averaging method. If you do, then you’re really stupid because Dollar Cost Averaging method is not designed to be used this way especially when you know when to sell high and buy low. So, do you think you're stupid or not?
What is the purpose of dollar cost averaging?
Dollar cost averaging is designed to be used by stupid people who doesn’t know exactly when to sell high and buy low. Also, this technique is designed for Long Term Investment Strategy – 5 to 7 years for example. If you’re using this method as a short-term investment strategy, then you use it for the wrong purpose. So now the question is - do you know when to sell high and buy low? Do you know the market goes up or down tomorrow? If you don’t know, use dollar cost averaging. But, would DCA guarantee Return of Investment (ROI)?
It is a very simple technique that you just need to invest fixed amount of money periodically (usually monthly). You can apply this whether to stock or unit trust or any kind of investment. This technique basically forces you to:
- Buy MORE units investment at lower prices
- Buy LESSER units investment at higher prices.
Obviously, when you think you’re stupid you use this method. Because of this method is designed for stupid people like you and me, therefore once you’re start using this method, you’re not considered as stupid anymore – you’re smart!
Here you go the reasons when you should use DCA:
- Don’t know when to sell high and when to buy low. You can use one lump sum investment strategy if you know exactly the lowest and the highest of the market
- Only if you BELIEVE your investment will goes up in long term - 5 to 7 years or even more years. If you intent to use DCA for short term investment, let’s forget about it
- Continue to use DCA even during market downtrend. Don't stop or complain about DCA method when you make a lost in investment. DCA is designed for you to even to invest more (buy more units) during market downtrend. Unless, you're kind of sure that the market will never be recovered again, you can give up DCA method then.
Dollar cost averaging is in fact a perfect method to guarantee the investment return as long as the market or stock or unit trust that you buy goes up in long run. Most importantly it reduces the risk when the market goes down and you can earn back your investment when the market goes up again.