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Dollar-Cost Averaging: How to protect yourself from major stock market declines.

April 16, 2024
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EasyEquities
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EasyEquities

What is Dollar-Cost Averaging?

Dollar-Cost Averaging

A common strategy that investors use is dollar-cost averaging.
Dollar-cost averaging is defined as dividing an investment up over time (usually 12 months). An investor who utilizes dollar-cost averaging will buy shares every month no matter what the price of the securities is.

The pros of dollar-cost averaging are that it will protect you against losses by diversifying over time and it can help lower your average purchase price. If an investor decides to invest all their money just before a major decline, they will lose more capital than they would if they split their investments up over 12 months.

Example

Tebza decided that he would like to invest R120 000. He chooses to dollar-cost average, as there is uncertainty in the market, and he wants to protect himself against huge losses in the event of a market decline or crash.
For the next 12 months, Tebza will invest R10 000 at the end of every month. This will ultimately help Tebza diversify over time and lower his average purchase price.

Dollar-cost averaging can also be a strategy that goes hand in hand with passive investing.
Figure 1 [refer to the image attached] gives an idea to investors of what dollar-cost averaging is, when to use it and when not to use it.

 


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