the New York stock market index

How many times have we heard in the news saying that the market has bottomed out, only to find the market falling further the next day? Or an investment seminar that claims that they can teach you how to time the market to get in at the lowest point?

Everyone knows the buy low, sell high investment strategy, but how often do we know when is the lowest price to buy and the highest price to sell? The truth is, no one can predict the movements of the stock market accurately!

For example, if you have $10,000 to invest in a fund, and if you think or heard from some investment news or seminar that the market has already bottomed out and now is the best time to invest, you put that $10,000 into the fund. But if the market does not think so, and it falls further. Your investment would then need to take a much longer time for it to appreciate.

So that leaves us with the question, “What investment strategy I can deploy to ensure that I remain invested in a bull and bear market?”

One strategy that one can use is called Dollar Cost Averaging (DCA) and it is one the simplest and one of the most effective strategies to ensure that you do not put all the amount intended for investments into the market all at one shot, not knowing when the best time to invest is. With Dollar Cost Averaging, you smooth the bumps in prices of the fund over time.

For example, if you were to split the $10,000 that you have for investment into 5 equal lots of $2,000 each into the same fund on a certain day of the month consecutively for 5 months, you do not have to worry about the price fluctuations. You will get more units when the price is lower. In the table below, at month 5, if you were to sell the units in the fund, based on the current price, $1, you would have made, $1 – $0.84 = $0.16

$0.16 x 12333 units = $1,973 in profits.

Month Investment Amount Price Units
1 $2,000 $       1.00 2000
2 $2,000 $       0.80 2500
3 $2,000 $       0.60 3333.333
4 $2,000 $       0.80 2500
5 $2,000 $       1.00 2000
$10,000 $       0.84 12333.33

By deploying the Dollar Cost Averaging strategy, you not only remain invested, you can be sure that when the market recovers, you are already there reaping the rewards.


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