By investing in investment funds over specific periodic intervals, such as monthly or quarterly, you may or may not reduce risk.
The upside of Dollar-Cost Averaging (DCA). This style of investing eliminates the personal gamble of trying to buy low and sell high. You average your investments, buying during the entire market cycle. You buy when the stock market is rising — the bullish period — and also when it is declining — the bearish phase.
DCA balances mutual fund purchases mathematically to an average price of these timed purchases. It solves the problem of over-investing during high markets. Conversely, in low markets, you automatically gain because you are buying units at a bargain precisely when many mutual fund prices are lower.
This strategy works best in markets where prices are declining in value and equity prices are at reduced levels. It also works well to simplify investment budgeting over the long term, such as when saving for a child’s education.
The downside of Dollar-Cost Averaging (DCA). This strategy may not be suitable for risk-tolerant investors. It is designed for the conservative investor to delay depositing monies while averaging out the price of the securities purchased. It works well when the market is going down in value. Conversely, when the market is gaining upward momentum, a timid investor can miss out on market gains. If you defer investing a large lump sum for many months or longer than a year, you may miss out on the gains that occur during bullish market surges, prompting many to invest.
Investing a sizeable sum in the market all at once may not fit your investment style. If not, you may still want to define and sculpt your asset allocation with the help of an advisor to determine how to invest your money and create and manage wealth.
Some investors may want to accelerate their investing in blue-chip equities that pay superior dividends. Those who do will be taking some reasonable risk. To assure downside protection, some may invest more heavily in bond funds and GICS.
If you have targeted your asset allocation based on your risk tolerance and only use DCA techniques to move money into your targeted portfolio, there may be an unconsidered risk of delaying capital accrual progress.
DCA may contradict or delay an asset allocation decision and increase the risk of not applying an otherwise good plan assertively in the long term.
If you retire in ten to fifteen years, you may want to take on more risk and invest your money for potential gain. Of course, that usually entails more risk. With the guidance of an advisor, who can help you establish an asset allocation plan, in accord with your risk tolerance, and a desire to assertively engage in strategic investing, alternatives to, or a combination with DCA, may work to your advantage. Studies have shown that many people have erred on the far side of caution — meaning when investments are deferred too long, it can impair any potential plan to meet retirement goals and future income needs.