I am not a financial advisor. The content is for informational purposes only and does not represent the views of Bitskwela. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing in this report constitutes a solicitation, recommendation, endorsement, or offer by any entity to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.
Do you want to perfectly time the market, buy the bottom and make that sweet 100x gain? Sorry to say, but you’d best give up on that. Truth be told, the best traders and investors admit that they have no idea where the market will actually go. Anyone telling you they can predict the future is probably either delusional or lying.
So what do we do then? How do people end up profiting from different markets? There are those with the skill to do technical analysis and slowly trade their way to the top. Sadly, there is a vast learning curve, and the average Joe who just started investing may not have the time nor will to get good at trading. Fortunately, there is another strategy that, although it may yield fewer profits, is easier and requires less effort. Anyone can do this strategy known as Dollar Cost Averaging.
Dollar Cost Averaging (DCA) is an investment strategy in which one sets aside capital to purchase an asset in several chunks over a period of time. This makes it so you do not have to time the market. Rather than trying to catch the bottom, your average buying price will likely be better when you spread out your buys as the asset eventually goes up. There are several variations to this strategy. The most common method is to set a schedule and invest the same dollar (or any fiat) amount regardless of price. For example, you could invest $100 every Sunday at 10:00 AM. Another way to do DCA is to put some money in every time the asset drops by a certain amount. For example, you could put in $1000 every time your desired asset falls by 10%. This ensures that you will always be buying at a discount relative to previous prices, but you may not be able to completely finish your buying if the asset goes up without reaching your desired entry points. Lastly, a more flexible way to do dollar cost averaging is to buy whenever you get extra income.
Here is an example of dollar cost averaging $100 every month over a 5-year period in the S&P 500. If you started investing last December 2017 and checked on it now, you would’ve invested a total of $6000, but your portfolio would now be worth around $7,820 which is around a 30% gain. This may not seem like that much at first but compounding a stable return over time will grow your portfolio considerably. As long as you remain consistent in DCA-ing, a small percentage return will actually amount to a lot of money with time.
We can see the returns to an even greater degree when we DCA into even smaller market cap assets like Bitcoin. Let’s follow the same timeframe and strategy of dollar cost averaging $100 every month starting December 2017 for 5 years. Here we can see again that we invested a total of $6,000, but our current portfolio value would now be $22,579, a whopping 276.32% gain!
What’s amazing about this strategy is that anyone can do it, yet the returns are still quite remarkable. As long as you pick a suitable asset that will go up with time, “DCA-ing” reduces your risk considerably. This is because you do not have to pick an exact bottom to dump all your hard-earned cash into and hope that it immediately goes up. With DCA-ing you can just slowly accumulate while going on with your daily life. There is no need to spend countless hours learning different trading strategies just to stare at a chart all day long. It takes the emotion out of our investing decisions and helps keep the discipline of building wealth over a long period of time.
On the other hand, there are also certain downsides to DCA-ing. For one, you will almost never catch the bottom nor nail the top. Expert traders could definitely outperform DCA-er and make more money, especially if the market is just in a long sideways choppy phase. Moreover, picking the wrong asset to DCA in could definitely drive your portfolio to lose money and time. Even if the asset is “right”, DCA-ing “too early” could also give you a worse price average than if you had just stuck to cash and waited.
Always remember to do your own due diligence in whichever asset you DCA in. Be it a stock, commodity, crypto or anything else, dollar cost averaging will only work if your asset is of value and stands the test of time. DCA helps in spreading out your average price, but you could still lose everything if the asset you chose never recovers after a crash. It is important to have a good fundamental basis on an asset before choosing to DCA into it.
In the end, just like any investment strategy, dollar cost averaging has its own strengths and weaknesses. It isn’t for everyone, yet it certainly can’t be refuted as the easiest to execute. If you ever find yourself lacking time to chart or getting too emotional with your investments, try DCA-ing for a while and see how it works for you!
We are making crypto knowledge-sharing even more accessible to everyone by giving an avenue for Filipinos to connect about all-things crypto in Facebook. Be part of our community today.