In today’s fast-paced world, young investors are presented with an array of opportunities to secure their financial future. However, the thought of investing can often seem daunting, particularly for those with modest capital who may believe the myth that a large capital is required to start investing.
Yet, it is precisely these young individuals who stand to gain the most by adopting the dollar-cost averaging investment strategy over longer time horizons.
By lowering the barriers to entry and emphasising the importance of consistency and incremental investments, this approach empowers individuals to embark on their wealth-building journey a dollar at a time.
Dollar-cost averaging
Fractional shares have revolutionised the concept of dollar-based investing by enabling investors to own portions of big-name stocks.
This development allows individuals to invest a set amount — such as $100 — into a single share or across multiple shares, making it feasible for young investors to open a stake in their favourite brands like Spotify, Google, Nike, Apple, Netflix, Puma and McDonald’s.
For example, young investors can consistently invest a fixed amount into these shares for long-term wealth accumulation. Dollar-cost averaging, facilitated by dollar-based investing, simplifies the process of sustained long-term investment.
By cultivating the habit of regular investment from an early age, individuals can forge an accessible path to building substantial wealth over time.
See also: Fuelled by China’s promise: Golden opportunity for Hong Kong SDR investing
Popularity of dollar-cost averaging
Beyond the straightforward approach of dollar-cost averaging, investors have the flexibility to invest any amount, starting from as little as US$1 ($1.36).
This method allows investors to decide when to invest and where to allocate their funds, granting them the freedom to tailor their investment strategies according to their personal preferences and financial objectives.
Investors can customise and diversify their portfolios using the dollar-cost averaging technique.
For example, consider an initial investment of US$100 split between Berkshire Hathaway, Nvidia, Tesla, Amazon and Apple. Of the total, US$50 was allocated to Berkshire while the remaining US$50 was evenly distributed among some of the “magnificent seven” stocks.
Assuming purchases were made from the start of the year until the end of March, the performance shows an estimated growth of 16.79%.
Geographic diversification in portfolio management
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Investors often turn to geographical diversification as a risk management strategy, using exchange-traded funds (ETFs) to achieve this goal effectively.
The chart illustrates an example where an initial capital of US$100 is evenly distributed across four distinct ETFs: Vanguard FTSE European ETF, SPDR S&P 500 ETF, iShares MSCI India ETF and iShares MSCI China ETF.
The estimated performance from January to the end of March reflects a notable growth of 5.94%, highlighting the potential benefits of geographic diversification in portfolio management.
Small change, big impact
With the innovative concept of DCA and consistent investment, even a dollar a day can significantly alleviate financial concerns.
Starting early and investing a fixed amount every month can foster habits of budgeting, planning and prioritising savings over discretionary spending among the younger generation.
Similarly, parents who wish to start investment for their children may adopt the DCA strategy and create a diversified portfolio for their children.
Starting early would also help to educate individuals about the financial markets, investment strategies, and long-term financial planning, instilling a mindset of abundance rather than scarcity.
Thus, the younger generation will not only secure their financial future but also embark on a journey of self-empowerment and financial liberation.
Thng Xiao Xiong is senior dealer at Phillip Securities specialising in UK markets and US options
Infographics: Phillip Securities
