However, every cloud has its silver lining. In these financial conditions our regular savings products – where clients can save small amounts every month – is more than just a silver lining. This simple process of saving acts as a great equalizer to the volatility one experience in the markets every now and then. The reason is a mathematical beauty that in our opinion, is even better than compound interest: Dollar Cost averaging (DCA).
DCA entails buying units at lower prices when the markets fall; thus lowering your overall average price in the long run. We know that in the long run a well-diversified portfolio ends up positive, but with DCA, the journey to the financial goal becomes less fraught with worry. Additionally, while riding out the movements of the market, you could also potentially end up better off than if you invested with a lump sum.
GWM model portfolio used at Generali International for return with a lump sum invested five years ago.
GWM model portfolio used at Generali International for investment in monthly instalments. Note the smoothness of the curve!