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Have you ever heard about DCA? I bet you did if you’re interested in investing. Or maybe you did but don’t know what does it mean.
What is DCA and why it is such a powerful tool in the quest for wealth?
This article is meant for both beginner investors and intermediate investors.
“Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase.”
– Investopedia
Before we talk about what DCA is, let’s talk about what it is not.
The opposite of DCA is the so-called Lump Sum, a strategy where you put money into the market in one piece.
The basic goal of this investment strategy is to minimalize the risks of the unpredictability of the market. You are essentially trading some of your profits for more security.
I also mentioned a bit about DCA in the article about personal finance habits, you must follow to achieve wealth.
Where I talked about how is it important to start saving.
What DCA embodies
- Reduces risks
- Preventing bad timing
- Lovering cost
Reducing risks & preventing bad timing
DCA removes that work of trying to time the market. As the market movements can’t be surely predicted and lump sum at the wrong time can result in risks.
In short, if you buy all the time you can’t end up, usually, in the red. Because prices are always expected to rise eventually.
But of course, it won’t protect you from losses if you buy the wrong individual stock or cryptocurrency. You always need to be properly informed about what you are investing in. This strategy works best on index funds, or possibly Bitcoin as the base cryptocurrency — altcoins after due consideration.
Lowering costs
Dollar-cost averaging also lover costs, as it makes sure that you buy more assets with a lower price than with a higher one.
At the same time, it only takes a small amount to make a big difference in the end. Meaning that with a LUMP SUM you need a big amount to make any impact. If you invest regularly after a few years you will have accumulated a large amount.
Why is DCA so powerful?
Since you invest regularly you have a bigger chance for a higher return. It helps investors to survive the extra risk and volatility that comes with investing and trading. You may wonder if is DCA better than a lump sum. Study shows that approximately 67% of the time lump sum leads to higher returns. But those who invest in “one-go” usually do a proper market analysis and know what they are doing. Which takes time and a lot of learning.
Conclusion
I personally use a combination of both. I have and mutual fund, where I DCA monthly, but that’s just because of the bonus my bank gives, we’re not gonna talk about that right now.
What I do want to mention though is that I use a combination of two investment strategies for my own investments. I don’t have a set day, week, month… when I invest. But I do have a set amount that I want to invest and I invest based on how the market is looking at the moment. And then I divide the amount accordingly. When the market goes down, I usually dollar-cost average more, I divide the amount into more pieces, because I don’t know how far the price will drop. If the market is going up I buy faster, or I skip that month or part of it completely.
DCA provides a really good way to invest directly for people who don’t understand it that well and don’t want to go through all the market analysis.
If you want to start investing but have nothing to invest I recommend you to grow a money tree according to my article.