Dollar-Cost Averaging (DCA) is a great way to invest in the long term and grow your investment portfolio. It helps you reduce your average cost per share when you buy shares at a time when the cost is low. It is a great way to start investing if you are a new investor and you have a small stake.
What Does Dollar Cost Averaging Mean?
Dollar Cost Averaging involves investing in a fixed amount of money in the same fund or stock at a regular interval over time to minimise the impact of price volatility and avoid the need to time the market in order to buy shares at a high point. The dollar-cost averaging ensures that you are not dumping money at a high point for prices. If you learn how best to do it, you can use it to grow your portfolio.
How to Dollar Cost Average
Is dollar cost averaging a good idea for investors? Yes, it is a good investment strategy. Dollar cost averaging strategy is a long term strategy that is used to invest, build wealth and portfolio over a long period. It helps the investor to neutralize or average short-term volatility in the market. One of good examples of dollar cost averaging strategy is the 401(k) plan.
This is how to do dollar cost averaging to build your portfolio:
- Decide on a predetermined amount you wish to be investing at a regular interval. Make sure that the amount is affordable so that you can make consistent contributions. The plan will be ineffective if you do not make regular contributions over time.
Decide the kind of long term investment like a mutual fund that you want to use to build a portfolio. It should be a long term investment in that it is at least five or ten years.
Make contributions towards your investment at regular intervals. The interval can be weekly, monthly or quarterly. You can set up automatic contributions so that you do not forget. Once you have you have grasped its basics, you may not need a broker to help you with the dollar cost averaging.
Dollar Cost Averaging Crypto
Dollar cost averaging crypto is the practice of investing a fixed amount of money into cryptocurrency such as bitcoin at a regular interval. For instance, for dollar cost averaging bitcoin, you can decide to be buying $10 worth of bitcoin every month. The method can prevent bitcoin investors from allocating all their money into bitcoin when prices are high. It means at the end of the period, you will have bought bitcoin at average prices when prices were high or low.
Some of the services you can use for dollar cost averaging bitcoin include:
Advantages of Dollar Cost Averaging
Dollar cost averaging reduces the risk of investing when the market prices are inflated. This helps one to buy more assets due to lower prices compared to the ones he would have bought at higher prices.
Dollar cost averaging strategy helps investors to buy assets when the prices are decreasing. This way, you get to buy more assets than you would have bought when the prices were high.
Promotes a Saving Habit
One of the requirements of dollar cost averaging is to invest at a regular interval. This ensures that the investor contributes the amount they devoted to regularly. This way, you can learn how to save by deducting savings from your income.
Prevents Bad Timing
Dollar cost averaging prevents an investor from losses in case they just started investing at a time when the market is declining. The prolonged market decline can hurt one’s portfolio by not getting any returns. DCA balances the upsides and downturns in the market thereby preventing one from making losses due to poor timing.
Dollar cost average helps an investor to average the downturns and upsides in the market. It ensures that the investor does not make losses through a one-time investment. Instead, the investor can ride out the downturns and build a portfolio with the upsides.
Disadvantages of Dollar Cost Averaging
Although dollar cost averaging is a great long term investment strategy, it has its downsides they include the following:
Higher Transaction Costs
Dollar cost averaging involves the investor investing in small amounts regularly. These small transactions can add up to a huge cost over a prolonged period. The transaction costs can almost equate to your portfolio gains.
Dollar cost averaging seeks to eliminate the risk of losses. The theory of risk and returns assumes that investments with low risk usually have low returns. The theory of dollar cost averaging reducing risks in investment lowers the returns. Also, the downturns in the market usually reduce the returns to an investor.
Final Word On Dollar Cost Averaging
Dollar cost averaging is a good investment strategy for a long term goal. Although the returns may not be high, it covers the investor against significant losses from lump-sum investment. You can use DCA to grow your portfolio over time by balancing the downturns and the upsides in the market.