Dollar cost averaging
Periodic investing, i.e spreading it over time, is a popular tactic. In chic investment language, we also call this the Dollar Cost Averaging tactic. This is a tactic where you invest a certain amount of money each month, quarter or year instead of investing all your money at once.
The main reason for applying this is because of risk minimization. We know that stock prices can rise and fall. The stock market cannot be timed, it can be unpredictable. To avoid investing your money at a peak of the market – after which you may achieve a negative return for a while because the prices fall – you can choose to invest an amount every month (or every quarter).
This way you spread over time, which minimizes the risk that volatility (the extent to which the price fluctuates) entails. Some other benefits may include:
Periodic investing is easily accessible
Depositing a smaller amount every month is quickly feasible. So you don’t need a lot of money to invest, a little every month is enough to build your wealth. Suppose you invest €200 every month, after one year this is already €2,400!
Better risk diversification
When you invest periodically, you are less dependent on timing. So you are not trying to time the market – and the right moment to buy. By timing we mean the moment you buy a certain investment. You want to get in when markets are low and sell when markets are high – buy low, sell high. But you don’t know when those low and high moments are. When you invest periodically, you avoid this unrest.
Take advantage of exchange rate fluctuations
In some cases, you can even benefit from price fluctuations with periodic investing. How does that work? Well, like this:
Imagine you invest €250 every month.
In month one you buy 10 ETFs worth €25 each.
The next month the prize of this ETF dropped to €20, so you buy €250/€20 = 12.5 ETFs.
The month after the prize of this ETF increased to €30 each, so you buy €250/30= 8.3 ETFs.
The 4th month the price of the ETF is again €25. You buy 10 of them for €250.
After for months you have 40.83 ETFs, instead of 40 ETFs when you would have invested €1000 at once in month 1.
Periodic investing brings peace of mind
By setting up a periodic transfer every month and investing automatically, you remove unrest. You see your investment as a monthly ‘fixed expense’ and do not get carried away by emotion: “Should I invest or not?”
Flexibility is nice. You can set up a periodic transfer per month, but you can also invest per quarter or per week, whichever suits you. Are you short on money for a few months? Then don’t invest. You have the freedom to decide for yourself how much you invest at a time.
Disadvantages of periodic investing
Periodic investing has many advantages, of which the diversification effect in our opinion is most relevant. Periodic investing can also have disadvantages when it comes to costs. At many brokers or banks when you make a transaction, you pay costs. And costs can put pressure on your return, we know that. Especially when you invest with smaller amounts, a transaction can cut considerably in your return. So double check the costs regarding your investments. At DEGIRO (broker) you can trade some ETFs for free every month, and at BUX Zero you can also trade commission-free.