Dollar Cost Avarage

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ou are well aware that markets can go down as well as up. However, did you know that you can take direct advantage of market movements to make more money?. The principle is very simple, it’s called Dollar Cost Averaging.

When markets are depressed unit values drop. However if the amount you save each month or year remains constant, you will buy more units when the price is low. When unit prices rise again you will obviously have a larger number of units than if the market had risen steadily.

The graphs and tables below shows how this principle works in practice. The figures assume that the fund fluctuates but eventually doubles over 10 years.

Year Amount

Invested Unit

Price Units

Purchased Total Units

Held Value

1 $10,000 $5.00 2,000 2,000 $10,000

2 $10,000 $2.00 5,000 7,000 $14,000

3 $10,000 $6.00 1,670 8,670 $52,002

4 $10,000 $3.00 3,330 12,000 $36,000

5 $10,000 $8.00 1,250 13,250 $106,000

6 $10,000 $4.00 2,500 15,750 $63,000

7 $10,000 $8.00 1,250 17,000 $136,000

8 $10,000 $5.00 2,000 19,000 $95,000

9 $10,000 $8.00 1,250 20,250 $162,000

10 $10,000 $10.00 1,000 21,250 $212,500

As you can see the total value of the fund is $212,500 for a capital investment of $10,000 per year for 10 years.

Now let’s look at a fund that doubles over 10 years but experiences steady consistent growth.

Year Amount

Invested Unit

Price Units

Purchased Total Units

Held Value

1 $10,000 $5.00 2,000 2,000 $10,000

2 $10,000 $5.50 1,818 3,818 $21,000

3 $10,000 $6.00 1,667 5,485 $32,909

4 $10,000 $6.50 1,538 7,023 $45,650

5 $10,000 $7.00 1,429 8,452 $59,164

6 $10,000 $7.50 1,333 9,785 $73,388

7 $10,000 $8.00 1,250 11,035 $88,280

8 $10,000 $8.50 1,176 12,211 $103,794

9 $10,000 $9.00 1,111 13,322 $119,898

10 $10,000 $10.00 1,000 14,322 $143,220

The second fund value ends up substantially lower because the cheapest units were only available in the first year. In this case the $10,000 per year amounts to just $143,220. As you can see, consistently less units were purchased each year, whereas the first fund benefited from the depressed markets in years 2, 4, 6 and 8. Both funds started with a unit price of $5.00 and finished with a unit price of $10.00 but the more volatile fund gave the