Dollar cost averaging, which works perfectly well in euros, francs or yen, is an investment approach set out by Benjamin Graham in his 1949 book “The Intelligent Investor” (Harper & Brothers).
Graham wrote that dollar cost averaging “means simply that the practitioner invests in common stocks the same number of dollars each month or each quarter. In this way he buys more shares when the market is low than when it is high and he is likely to end up with a satisfactory overall price for all his holdings.”
By setting aside the same amount of money on a regular basis, over the long term, investors will end up paying the right price for their portfolio. When markets drop, they will buy more shares or fund units. When markets spike, they won’t overpay.
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Bryan Ferrari, an investment advisor at the state savings bank Spuerkeess, has said that that frequently buying an asset at a fixed price can potentially lower the average cost per share of the investment, making it more financially prudent over the long term.
“With DCAs, often when you’re a beginner, you think you can time the market, but nobody can, even us professionals,” Ferrari said. “So the best way to not time the market is by not putting all your eggs at once in the basket but doing it one after the other. If you have a down month, it’s fine; if you have an up month, it’s definitely good, but in the long run, markets tend to go up [as will your investment].”
As the CFA Institute noted, the dollar cost averaging works best for people saving for retirement, but is less helpful for investors looking to place larger sum, such as an inheritance or pension payout.
