Dollar Cost Averaging

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Dollar Cost Averaging (DCA)Dollar Cost Averaging (aka DCA) is an investment strategy where a buyer purchases an asset at a fixed amount periodically (daily/weekly/monthly/etc) rather than buying a dip or investing a lump sum. Dollar-cost averaging provides three key benefits that can result in better returns:

1) Avoids mistiming the market
2) Takes emotion out of investing
3) Encourages one to think and act long-term

Buying at regular intervals puts investing on auto-pilot since the investor is buying fixed amounts sequently. In doing so, it can be a very powerful tool in bear markets, allowing one to buy according to a plan when most investors are in/out based on fear/greed or see volatility and act with short-term thinking. Committing to a DCA strategy means that one will be investing without ever trying to read markets. It is truly the longs long. But the investor also needs an exit strategy – which can also be sequential based on a % of the profits expected to take as new highs are made.

EXAMPLE: Joe is a contractor who has been buying $200 worth of gold every month since Feb 2014. In this scenario he bought into a long bear market starting at $1200 an ounce and continues into gold’s bull market in 2020. As gold reaches $2,000 an ounce he stops buying and sales 10%, at $2,500 he plans to sale 20%, at $3,000 20% more and so on till he is completely liquid or the price per ounce stops going higher.

Dollar-cost averaging saves investors from psychological biases, because most investors swing between fear and greed, so they are prone to making emotional trading decisions as the market swings between highs and lows.