If you are looking at ways to generate wealth via stocks, mutual funds, ETFs (exchange-traded funds), or the likes of Bitcoin, the chances are you may have come across the opportunity for Dollar Cost Averaging.
But what exactly is it, and more to the point is it worth it?
In this guide we will explore the concept of Dollar Cost Averaging in more detail, so you can get a further understanding of whether it might be right for you.
So, let’s get started!
What Is Dollar Cost Averaging?
The term ‘Dollar Cost Averaging’ first appeared in Benjamin Graham’s iconic book The Intelligent Investor in 1949.
Essentially, it is a strategy that attempts to minimise your risk by reducing the cost of your investments.
According to Graham, dollar cost averaging is a practice where someone ‘invests in common stocks the same number of dollars each month or each quarter. In this way he buys more shares when the market is low than when it is high, and he is likely to end up with a satisfactory overall price for all his holdings."
What this means is that instead of buying, for example, $10000 shares in one transaction, you divide the total amount of money you would like to invest into smaller amounts i.e. $250, which you would then buy at regular intervals over time, until you have reached the $10,000 limit.
The beauty of this strategy is that it can significantly decreases the risk of you paying too much before market prices drop.
Does Dollar Cost Averaging Work?
In potentially volatile markets, Dollar Cost Averaging can be an effective strategy when it comes to generating wealth, as it enables you to invest in a more considered way.
Taking a lot of the emotion out of proceedings, it runs on the theory that you will buy fewer shares over time when the prices are high and more when they are lower.
This in turn means you should hopefully acquire more shares overall, than you would have done had you made a one-off transaction.
Prices of course can go up, as well as down. But if you split the amount you want to invest into smaller and regular purchases, you do markedly increase your chances of buying them at a cheaper overall cost.
Furthermore, Dollar Cost Averaging gets your money working on a consistent basis, which is always a critical factor for the growth of your investments.
Isn’t it better to invest more when prices are low?
Ordinarily, the question of whether it is better to invest more when prices are low, is a no-brainer, because of course, it is!
However, in reality it is very difficult to predict when prices will be at their lowest – even the most seasoned of stock market professionals have been caught out doing this.
Therefore, Dollar Cost Averaging works better because, although prices do tend to increase over a long period of time, they don’t often do this consistently.
Instead, they follow a fluctuating pattern of short term highs and lows which are almost impossible for anyone to predict.
The low rate you find today may well turn out to be next week’s high price. Likewise, a high price today may well turn out to a low-price next month.
It is only in hindsight that we can identify what the true ‘low’ rate was, and of course hindsight is a wonderful thing.
In the absence of it, people who have attempted to time the market purchase of their assets often end up doing so at a price which has flat-lined after making huge gains.
According to research by Charles Schwab, investors who attempted to do this saw drastically less gains than those who adopted a dollar cost averaging approach to investing.
Dollar Cost Averaging helps those with less to Invest
For those who do not have a lot of money at their disposal, Dollar Cost Averaging is a very good option as it enables them to start investing with small amounts of money.
This can be especially good if you are looking to invest in stocks and shares, or even something like Bitcoin with Independent Reserve.
By investing smaller amounts of money regularly, you don’t have to overstretch yourself whilst attempting to generate wealth.
In addition, adopting this approach means you will also be investing even when the market is down. Many people don’t actually do this, or completely withdraw their investments during downturns in the market. Which in turn means they can miss out on huge returns of future growth when the market improves.
Who should adopt the Dollar Cost Averaging strategy?
Dollar Cost Averaging could well be right for you if you are a novice investor, only have small amounts of money to invest, or are not interested in constantly monitoring the market.
By contrast, you might prefer another investment strategy if you have a large sum of money to invest, are investing for a quick short-term game, or would rather time the market and do all the activities that are involved with that.
Also, it might not be right for you if you plan to invest in mutual funds which generally have a higher initial minimum investment value via a taxable brokerage account.
We hope you have enjoyed our review of the concept of Dollar Cost Averaging.
Hopefully it has provided you with an excellent insight as to what is it and whether it is something worth your while pursuing.
If it is, and you are now thinking about what to invest in, you might be interested to read our post on why Bitcoin Could Be One of The Greatest Bull Markets in History.