INVESTING 101 - DOLLAR COST AVERAGING
Now you’ve decided to begin investing, you might have heard “buy low, sell high”, but how do we do that? How do we prevent ourselves from buying the wrong investments at the wrong times?
DCA helps solve these questions!
Pro-Tip: You should always start early and stick to a plan!👊
“If you fail to plan, you are planning to fail!” - Benjamin Franklin
What is Dollar-cost averaging(DCA)?
Dollar-cost averaging is a popular strategy investing over the long term. You are investing equal dollar amounts in the market at regular intervals of time! (monthly, quarterly, half-yearly or yearly)
The idea is to get the best deal on your investment by reducing the overall impact of the market's ‘high and lows’ by investing at a range of different price points rather than trying to time the market.
EXAMPLE:
If I plan to invest 10,000 and my stock is now at $50/share.
Now Cost per share is $50.
The number of shares I get is 200.
If I were to DCA over 5 months with $2,000 monthly.
The prices fluctuate every month at $50, $40, $30, $45 and $55.
Now the average cost per share will be $44
(add $50, $40, $30, $45, and $55, and divide by five)
The number of shares I get now is 236.
You’d have a lower cost and you get more numbers of shares which gives you more returns in the long run.
Stop trying to time the market
You may be thinking: "Wouldn't it be better to have bought all of your shares when the stock was trading for $20?"
Hindsight is always 20/20. All the could haves and should-haves. We cannot reliably predict the future so we DCA.
It’s easy to imagine scenarios in which a lump-sum purchase beats dollar-cost averaging. But in general, dollar-cost averaging provides three key benefits that can result in better returns. It can help you:
Avoid mistiming the market
Take emotion out of investing
Think longer-term
The steps to DCA.
Decide how much money you want to invest
Decide how often you want to make your investments: daily, weekly, monthly, quarterly, annually, or any interval that you like.
Decide how long you want to invest for
Start and stick to the plan.
In a nutshell,
Dollar-cost averaging saves you and your money from your emotions. We are all emotional beings and swing between fear and greed and because of this we are prone to making emotional trading decisions as the market fluctuates.
if you’re dollar-cost averaging, you’ll be buying when people are selling from panicking, getting you a nice price, and setting yourself up for strong long-term gains.
The market tends to go up over time, and dollar-cost averaging can help you recognize that a bear market is a great long-term opportunity, rather than a threat.
You are awesome so if you need help I'll be there for you! 🔥
If you'd like to start investing and want to engage a trusted advisor, book a discovery call with me so we can find out your goals and what's the most appropriate solution!
Disclaimer: All investments have their own risks, please do your due diligence before making any decisions.