 Good day fellow investors! My name is Sven Kerlin and today we'll talk about dollar cost averaging. We'll discuss what it is, how the strategy can be applied by novice investors and sophisticated investors. It is a very interesting strategy because over the long term it can lower your risk and increase your returns, which is the best thing that can happen to investors. So what is dollar cost averaging? Dollar cost averaging is investing a fixed amount in a certain investment per month no matter the price. So if the stock price goes down you just invest always the same amount and buy a little bit more of the stock or the company. So you buy a larger amount of stocks. If the stock price is high you still invest and then you buy a little bit less. The point is that during time you have an average investment price. So you buy a little bit less at peak times and a little bit more at market bottoms. This allows you to be happy of course when stock markets go up but also to be happy when stock markets go down because when they go down you simply buy more. But it's very important that a dollar cost averaging strategy is applied constantly through thick and thin especially through thin. Don't stop investing your fixed amounts per month when there is a crisis or recession because those returns from the amounts you invested in a crisis will be the largest returns you can enjoy on your portfolio. So let me first compare dollar cost averaging with a lump sum investment. So if I invested $100,000 in the SAP 500 20 years ago I would now have $310,781 for a nice 5.8 yearly return which is exactly in line with the 18.94 price earnings ratio that the SAP 500 offered in April 1997. So as you can see in the long term stock returns are really correlated to earnings. Very important to look for sophisticated investors. However what what's also very important is that in the 20 year period the SAP 500 experienced two declines of 50%. So the person that invested $100,000 would have had to suffer through two declines of 50% when you see 50% of your portfolio value disappear. That's very hard to do. However over the long run the returns have been positive. For now perhaps there is a 50% decline around the coroner in the next six months or a year. Now the second strategy different than a lump sum investment is dollar cost averaging. So imagine that we invested over 20 years $5,000 per year in the SAP 500. Thus in 20 years we will have invested the same amount of money. The total return would have been $188,000. Of course the return is lower because 20 years ago we just investment $5,000 and not $100,000. However if you look at the figure here the risk is much lower because the volatility is much lower and the last 5,000 years have been invested last year not 20 years ago. So what we have to compare is the average return. Remember the average return on the lump sum was 5.8%. And here you can see how the average return on the dollar cost averaging strategy was almost 7%, 6.98 on average. If we go through year by year we can see how depending on where the stock prices were, 1997 they were higher, 2000 they were higher and the returns were around 3-4%. However in the crisis 2002 and especially 2009 that was the period when dollar cost averaging strategy provided the highest return. And this is extremely important for investing because when you buy in recessions you achieve the highest returns. So for the novice investor dollar cost averaging is an excellent strategy. You have lower volatility and your long-time returns are much higher than investing just a lump sum especially now that the market is extremely overvalued. So think about that when approaching investment. Lower risk, higher returns for using a dollar cost averaging strategy. However you must be consistent with it. It doesn't do any good if you invest now and then two years from now when there is a recession you don't invest. That's a terrible strategy. Now dollar cost averaging for sophisticated investors is also very important. When you find an undervalued stock, when you find a sector that's unlike by the markets you never know how low can that sector go. So if you say I think it's a good sector in the long term it will do well and you start buying a little bit every month and you catch also the bottom of that sector because if it's a good sector it will eventually rebound. Or panic will push it so low that its balance will be higher so again it will eventually rebound. If the dollar cost average somehow some part of your portfolio will buy on the bottom and those will again bring to the highest returns. Another thing for the sophisticated investor is of course we know that the SAP 500 will probably fall 50, 60, 70% somewhere in the future. But we don't know if it will be just 40, 50 or more. So we'll have to start buying at some point let's say after a 50% SAP 500 decline the price earnings ratio will be 13 so it will be a good investment. So we'll have to start buying at 50% decline but then there is a possibility it will drop to 60, 70, 80%. And the only thing that an investor can do is buy more and that's dollar cost averaging for the sophisticated investor especially when you know that there is value. Thank you for watching. If you have not yet subscribed please subscribe as on this channel we share investment insights, market commentary and most importantly we analyze specific investment ideas. We try to find, we strive for investments that will give us more than 10% per year and that are low risks for even higher returns. Thank you for watching, leave your comments below and I'll see you in the next video.