BUILDING WEALTH THROUGH DOLLAR-COST AVERAGING

Investors will often ask whether this is the right time to buy stocks. Will the stock go up tomorrow or in a week from now? Even the world’s greatest investor, Warren Buffet, says he has no idea what the stock market is going to do tomorrow, next week or next year. However, what we all know is that over the long term – and by long term we mean anything longer than 10 years – the world economy will surely expand and the overall stock market should go up accordingly. For those who have a stream of monthly income, dollar-cost averaging (DCA) can be a good strategy for creating and maintaining the necessary discipline for investing. DCA is the practice of investing equal dollar amounts at specified intervals such as weekly, monthly, quarterly and so on. Let’s say you buy 10,000 baht worth of indexed funds each month. If the fund price is 10 baht, you will receive 1,000 shares, and if next month the fund price edges up to 20 baht, you will receive 500 shares.

One of the key advantages to dollar-cost averaging is that by investing equal amounts at a defined time, you will not back off when the stock price goes down substantially, but rather see it as an opportunity to acquire more shares at a lower cost. In other words, the emotional component is taken out of your decision-making, and you will be a more disciplined investor. Also, if you happen to be buying during a time when the market is declining, you will end up buying more shares over time, and avoid overpaying by making a lump sum investment upfront. Overall, dollar-cost averaging is suitable for investors who have less experience but have monthly income streams and would like to follow a preset approach so that their risk exposure to wild market swings is reduced.

Skul Boondiskulchok, CFA, is an assistant vice-president at Bangkok Bank’s Treasury Division.