Dollar cost averaging: 6 reasons to automate your investments


At the end of November 2015, I bought stocks from Alibaba, a prominent Chinese conglomerate, and by now the world’s largest e-commerce company.

At that time, I had never heard of the words ‘dollar-cost averaging.’

I had read a lot about Alibaba, and I was very excited about it.

I bought 50 shares at USD 84.08 per share. 

But in the few months that followed, Alibaba’s share price decreased to a low of USD 60.89 per share (-27.6%).

That was hard… It looked like I invested in Alibaba at the worst possible time.

Despite the demons in my head, I held up to my shares because I knew it was a great company.

But I could not help but check Alibaba’s share price ALL THE TIME.

Then, the share price started creeping up again, and by 20 July 2016, Alibaba was back up at USD 84.42 per share (+0.4%).

I was pleased and planned to hold my Alibaba shares for the end of time.

Or so I thought.

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But later that year, Donald Trump was unexpectedly elected President of the United States.

And then, I got scared. Because I kept reading in the news how Donald Trump would ruin the world. And how the stock market would crash.

In a rush, I logged in and sold my beloved Alibaba shares for USD 99.85 per share (+18.8%).

Well, at least I didn’t lose my money, right?

Right. Except, Alibaba is now trading at USD 157.59 per share (+87.4%). And it is a great company which is here to stay and grow.

I am sharing this (rather embarrassing!) story of mine to tell you that there is a far superior way to invest.

An investment strategy that has been successful for decades. An approach that is sooooo very easy to understand and implement that it may be difficult to believe it just works so well.

It’s called dollar-cost averaging.


Dollar-cost averaging: what is it exactly?

With dollar-cost averaging, you invest a little bit every month, rather than invest a big chunk of money at once.

And you do that through a system that invests your money automatically every month (or every quarter).

For example, if you want to invest USD 12,000 in one given year, you would do so in 12 automatic monthly installments of USD 1,000.

Or you could also just invest USD 100, USD 50, or only USD 25 per month.

When you invest the same amount each month, you end up buying more shares when prices are down and fewer shares were prices are high.

In other words, you buy more when it costs less.

1. Timing the market just right

When I was younger, I held off investing way too long for one reason: I was afraid to lose my money.

What if I invested my hard-earned savings right just before a market crash?

In fact, investing at the right moment is something almost impossible to do.

Research over a century of investing has demonstrated that nobody can predict what will happen, not even the most experienced and knowledgeable investors.

But with automatic averaging, you eliminate your chances of investing at the wrong moment.

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2. Keeping your emotions in check

Now let’s talk about our worst enemy when it comes to investing.

… which is… ourselves!!!

Our emotions often get the better of us and often lead us to:

  • Delay investing

  • Invest when prices are too high

  • Sell when prices have decreased

  • Investing too little (or not at all!)

  • Only buying shares in companies that we know rather than diversify

Look at the chart above; it does a great job at illustrating how our emotions work against us when it comes to investing.

In short, we typically invest when prices are high because the recent rise in price boosts our confidence.

And we sell when the stock market crashes because we feel we are losing money.

This is why automatic investing is the best way to avoid letting your emotions screw up our investment endeavors.

3. Sit back and enjoy your life

A lot of my friends tell me they don’t invest because they don’t have the time nor the desire to manage their investments constantly.

They think of a good investor as a trader behind multiple screens who is watching every little movement of the stock market while frantically reading every piece of news that is scrolling on his screen.

And they don’t want to do that.

I could not agree more.

As a single mother of two working full-time, I can barely manage my day-to-day workload.

Which is why I certainly don’t have time to watch the news and make investment decisions all the time.

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And I am sure you are VERY busy too!

But with dollar-cost averaging, you just have to do some work upfront when you choose the platform, open the account, and set up your recurring monthly payments.

And then you are all set!

Of course, every year, you should review your portfolio and assess the level of your contributions.

But otherwise,

No need to log in all the time to process buy and sell transactions

No need to follow the news about your investments like a frenzied maniac

No need to learn about all the tricks, techniques and secrets of the so-called investment gurus

No need to review and analyze your portfolio all the time

None of that. Really.

4. Dollar-cost averaging is cost-efficient

Each time you manually place a transaction in an online brokerage account such as Interactive Brokers, you will be charged a fee which is usually proportional to the amount you invest, but subject to a minimum fee.

This means that if you place several transactions each year, you can end up paying a lot in transaction fees.

Instead, you will not pay any transaction fees when you invest automatically.

However, here is a word of caution: the traditional banks will be very keen to sell you their solutions for automatic investing.

But beware! These are way too costly! Over time, the management fees charged for such products will eat up to half of your investment returns.

Instead, the best ways to invest automatically are online robo-advisors and savings plans that invest in ETFs or index funds:

I) Online robo-advisors

Robo-advisors such as Moneyfarm in the UK, Growney in Germany, and Truewealth in Switzerland are online platforms that invest your money based on an algorithm as per a pre-determined investment allocation tied to your specific risk profile.

As a result of automation, online robo-advisors typically have low all-inclusive annual management fees ranging from 0.3% to 1.0%.

Also, robo-advisors often invest in Exchange Traded Funds (ETFs), offering you diversification benefits at a low cost.

- How to Start Investing with Online Robo Advisory Platforms

II) Savings plan

Another great way to invest automatically is through a savings plan that invests in ETFs and index funds. Rather than charging an annual management fee, these plans will charge you a small fee on each contribution.

They are available in Germany and work best if your income is in EUR.

You will find a list of cost-effective savings plans here.

5. Don't worry, be happy

When it comes to investing, our emotions are our worst enemy.

And fortunately, dollar cost averaging and automatic investing remove emotion out of investing.

But there is more to it.

With such a system in place, you know that your investments will survive unstable markets.

And that they will continue to grow over the long term, regardless of market movements.

Because when you invest the same amount every month with a pre-determined asset allocation, the fluctuations of the market end up increasing your gains, instead of decreasing them.

That means that you can go through your life knowing that

  • You are continuously saving money

  • You are constantly investing

  • And with all of that, you are working towards financial security

  • While also planning for your retirement

In short, with automatic investing, you can sleep better at night and have more confidence in what is yet to come in your life.

6. All is set for the long-term

What matters now is not how much you can invest.

What matters is to get started and implement the steps you need to invest automatically.

And that regardless of whether the stock market is high or low right now.

Over time, you will likely be able to increase your monthly contributions. And you will be able to do so in just a few clicks.

And later, if and when you decide to look at further investment options, you will feel that you can take your time to choose the best investments.

Because your ‘base’ automatic investment plan will already be in place and working for you.


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