What is dollar-cost averaging and why is it popular with long-term investors?
Dollar-cost averaging is the investment strategy of spreading out your investment purchases, buying at regular intervals and in roughly equal amounts. When done properly, it can have significant benefits for your portfolio. Dollar-cost averaging can “smooth” your purchase price over time and help ensure that you’re not dumping all your money in at a market peak.
A great example of dollar-cost averaging is superannuation accounts. Regular investments are made every time your salary is paid to your super account – regardless of the market price of the investments within your account at that point in time.
Of course, superannuation is just one example! You can dollar-cost average into direct shares, micro-investing apps, or any asset with sufficient liquidity for you to incrementally invest into it.
What is sufficient liquidity? Well, that depends on what you’re investing in and how much you have available to periodically invest. We’ll get to that next.
Why is dollar-cost averaging popular with long-term investors?
With dollar-cost averaging you:
- Have the potential to earn above-market returns without timing the market
- Spend significantly less time managing your investments
- Spend significantly less emotional energy managing your investments
If you’d like to learn more about the fundamentals of dollar-cost averaging, read this article: What is Dollar-Cost Averaging (DCA) and Why is it a Good Investing Strategy?
What options do I have to dollar-cost average?
I’ve got good news for you: if you’re employed in Australia, you’re already dollar-cost averaging! Regular investments are made every time your wages are paid into your super account. This incremental investing behaviour is the essence of DCA.
You also have the option to dollar-cost average outside of superannuation too. The two most common ways to do this are investing directly into shares (specifically, exchange-traded funds (ETFs) are typically used to achieve this), or by using a micro-investing app which invests into one or more exchange-traded funds on your behalf.
Dollar-cost averaging into ETFs directly
- Control and choice: Investors have direct control over which ETFs they purchase and when they make the purchases. This can lead to more tailored investment choices based on personal research and preferences.
- Brokerage fees + ETF fees: The costs involved are the brokerage fees for buying the ETFs, plus the ETF management fees.
- Minimum investment: In Australia, the minimum investment amount is typically $500 per stock, or in this case, $500 per ETF.
- Time and knowledge requirement: It requires time and investment knowledge to research ETFs.
To implement this option, you’ll need to use an online broker. Some brokers, like Pearler, also enable you to automate this entirely . Many brokers don’t, though, so watch out for that.
Use a micro-investing app
- Ease and simplicity: These apps are designed for ease of use, often making them more accessible for beginners.
- Micro fees + ETF fees: The costs involved are micro-investing app fees (monthly fees or percentage-based fees) plus the ETF management fees.
- Minimum investment: Generally, very low or no minimum investment is required.
- Investment options: Micro-investing apps typically offer a range of investment options, but the choice is limited compared to direct ETF investing.
To pursue this choice, you’ll need to select a micro-investing app. The most cost-effective apps tend to be ones that charge a flat fee regardless of balance sizes. With that said, there are an array of factors which differentiate micro-investing apps, so do your research to find the right one for you.
Key differences
- Control: Direct investing in ETFs offers more control but requires more involvement, whereas micro-investing apps are simpler to get started with.
- Fees: Direct investing might have lower proportional fees for larger amounts, but micro-investing apps typically have simpler fee structures, which are typically more advantageous for small balances.
- Investment threshold: Direct investing typically requires a higher initial investment than micro-investing apps.
- Suitability: Micro-investing apps can often be better for those who want to learn to invest with a small balance. Direct investing is better for those who are ready to make significant investments and accumulate material, long-term wealth.
In conclusion, the choice between these two methods depends on your investment goals; the amount you're willing to invest; your desire for control over your investment choices; your knowledge of investing; and your tolerance for fees. For someone who is keen to make significant incremental investments, direct ETF dollar-cost averaging may be more suitable. Conversely, for someone who's just starting and wants to learn to invest with a small balance, a micro-investing app could potentially be more appropriate.
How much do I need to dollar-cost average?
This depends on which option you choose!
For dollar-cost averaging into micro investing apps, the minimum investment amount is very low, ranging between $1 and $10 depending on the platform, which typically allows most people to invest whenever they choose.
If you want to dollar-cost average directly into ETFs, then there is more to take into account. The minimum investment amount on the ASX is $500. This doesn’t mean you need to be investing $500 every time you get paid, but it does mean that each investment you make needs to be at least $500.
What Pearler investors tend to do is set a minimum investment amount of $500 to $2,000, accumulate a portion of that each time they are paid, and then once they reach their investment amount, invest it.
For example, if I had a minimum investment amount of $1,000, set aside $500 each time I am paid to invest and am paid monthly, then on the first month I would put aside $500, and then the second I’d have $1,000 saved and invest it.
This process sounds complicated but it can be 100% automated using Automate . Once it's set up you don’t have to do anything! This is how most Pearler users do it.
To answer the question, you can dollar-cost average with very small (< $10) investments using micro-investing apps. If you want to dollar-cost average directly into shares or ETFs then you need more; if you were to save $10 each week then it would take you 50 weeks to make one direct investment!
How much more depends on how much you have available to put towards investments each time you get paid, how often you get paid, and what you want your minimum investment amount to be.
Happy investing!
Kurt
