Dollar Cost Averaging - your financial friend!

Welcome to Finance Friday.

Last Friday we discussed many of the questions that investors find difficult. This week we are going to concentrate on only one question and explore 'dollar cost averaging' (DCA), a technique that can help you invest regularly regardless of market ups and downs. Dollar cost averaging removes the question of ‘when should I buy?’ Remember that emotions can cloud our judgment, leading us to buy high and sell low.

Introducing Dollar Cost Averaging

‘Dollar cost averaging’ is when we invest a consistent amount each week or month. You do this whatever the price of the asset is (unless it is well outside its usual range for some reason - for instance, war). This means that our decision-making process is only how much to invest each month and not when to invest.

Where does the name come from?

‘Dollar cost averaging’ was a term invented by analyst, investor, professor and author Benjamin Graham in his book ‘The Intelligent Investor’. Graham introduced the idea of dollar cost averaging as a way for investors to handle price fluctuations in the market.

Graham was a British-born American so he used his local currency - the US dollar. However, the concept works for every currency but the technique is always known as ‘dollar cost averaging’.

Why is DCA so powerful?

Let’s look at an example:

Julie decides to invest 100$ in Stock A every month.

In month 1 the price of stock A is 1$. She buys 100 shares at 1$ = 100$.

In month 2 the price of the stock has fallen to 80 cents. She buys 125 shares at 80 cents = 100$.

This is an example of dollar cost averaging where Julie would continue to buy $100 worth of shares in Stock A every month.

After 2 months what is Julie’s average price for Stock A?

Hopefully, you did not say 90 cents.

Julie now has 225 shares for a total price of 200$ = 89 cents per share.

Even if the share price continues to fall Julie’s average price per individual share will also continue to fall.

By dollar cost averaging Julie automatically buys more of the stock when the price is lower but less of the stock when the price is higher.

When using dollar cost averaging you never get the best price (i.e. the lowest price) but also you never get the worst price (i.e. the highest).

Where to Buy ETFs

Recommending specific brokers is beyond the scope of these newsletters. However, ETFs can be bought through most brokers such as Degiro and Interactive Brokers. Your broker for shares should be able to sell ETFs.

Simply open an account and search for the ETF you are interested in. However, be careful to identify the correct ETF that you are interested in. I do this using the ISIN number which is a unique 12-digit number for securities.

I have previously mentioned justetf.com to research ETFs. I research the ETF that I am interested in on justetf.com before copying the ISIN into the search box on my broker’s website. Finally, I check that the names match.

Words of the Day: Dollar, Cost, Average

Dollar - noun - the unit of currency in the USA, Canada, Australia and other countries. We will often use UD dollars in these newsletters as the USD is often the base currency for commodities such as Gold, Silver etc.

Cost - noun - the amount of money you have to pay for something

Average - noun- the number you get by adding 2 or more amounts together and dividing by the number of amounts.

Breaking News!

Ethereum ETF Gets Initial Approval in the US!

News came in overnight (in Europe) that the Ethereum ETF has received initial approval in the US. While markets haven't reacted significantly yet, this approval could be a positive step for Ethereum's accessibility, similar to how Bitcoin ETFs boosted adoption earlier this year.

What does this mean?

When the Bitcoin ETFs were approved in January of this year, they became the fastest-growing ETFs in history. I wouldn't expect the same meteoric rise for Ethereum, but anything that allows cryptocurrencies to become more accessible to the general public is likely beneficial for the industry.

This development could be another positive step towards wider cryptocurrency adoption, similar to the success of Bitcoin ETFs.

Do you have any Business English questions?

Please email me and I will do my best to answer them in future newsletters.

Until Monday - have a great weekend!

Iain.

www.communicateenglish.com

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