Dollar Cost Averaging (DCA)
Dollar cost averaging (DCA) is a strategy used by investors that involves investing equal dollar amounts regularly and periodically over a period of time into the same portfolio of shares. By utilizing this strategy the investor is able to purchase more shares when the prices are low and fewer shares when the prices are high. This strategy will balance out the average cost per share in the investment portfolio over time. This strategy is best used over a minimum of 6 months.

Example of DCA
If an investor was planning on buying a portfolio of shares such as those in the ASX S&P/20 they could use the dollar cost averaging (DCA) strategy and start out with an initial investment of $500, each month adding another $500 to their share portfolio. if the share market was to decline in value during the month the investor would be able to buy more of each share because they are currently cheaper than the previous month. If the next month the share market was increasing then the investor would be able to buy fewer shares for that month.

In this example the average cost of the shares were $19.80 over the 5 months using this strategy.

Best Funds for Strategy
To lower the cost of this strategy the investor could invest into a index fund that will track the performance of the top 20, 100, or 200 Australian companies. Another option is to use a managed fund, but the entry costs may be higher.

The final option is using a Separately Managed Account (SMA) which will pool investors funds and buy shares in bulk reducing the transaction costs for the investor, the benefit is that the investor ends up owning the shares too. Generally brokerage would cost about $2.50 per $5,000 invested. If the investor was to purchase the shares normally it could cost up to $400 (investing in just the top 20 companies).

An example of an SMA fund is the BlueChip 20 which is offered by 2020 Direct Invest, and Westpac.

Benefits of DCA

• Eases the investor into the share market over time
• Allows investors to contribute to their portfolio on a regular basis
• Eliminates the issue of timing the markets
  
• More affordable option when just starting out in the share market

Disadvantages

• If you are not using a managed fund then the entry costs would be excessive
• It would be time consuming if the investor was purchasing all the shares