Dollar Cost Averaging – A Good Investment Strategy?
Last updated on August 25th, 2023 at 06:20 pm
People often have a love hate relationship when it comes to investing…
Let’s face it… you know you have to invest if you want to have any amount of wealth when it comes time to retire…
But, you may have some angst because you may not know where to begin or perhaps you don’t like the inherently risky nature of investing.
But, no matter what your relationship is with the idea of investing… the fact remains that you need to do some form of investing for your long term financial well-being.
What Is An Investment Strategy?
So once you finally decide you are going to invest, you need to have an investment strategy.
Ironically, this is often given less thought by most people than where you’re going to go on vacation.
Failing to have a strategy which fits your long term wealth goals is a kin to having a plan to fail.
When people talk about investment strategy, they are usually speaking of traditional investments, stocks, bonds, ETFs, mutual funds, gold, etc.
Frankly, it’s important to have a strategy no matter what you’re doing in life… but it becomes increasingly imperative as the choices you make with where to put your money will have long term ramifications on your life and perhaps that of your family.
So, let’s begin with, what does it mean to have an investment strategy?
In the simplest terms, an investment strategy is a layout, blue print, game plan or guideline for your investment portfolio.
When you set up your investment strategy it’s is important to decide exactly what your long term goals are. Decide in the beginning, what exactly are you looking to accomplish.
Now, realize that your goals and outcomes may change as life ‘happens’… so be sure to check back in with your goals periodically.
Dollar Cost Averaging As An Investment Strategy
So, the ‘meat and potatoes’ of this article is the use of dollar cost averaging.
To that end, we are going to explain exactly what it is, both in the traditional space as well as how it relates to the cryptocurrency space.
What Is Dollar Cost Averaging
- Is a popular investment strategy when investing in stocks.
- It provides investors with a disciplined method of investing into their portfolio over time to build wealth while helping them to keep their emotions in check.
Basically this strategy allows an investor to make identical, fractional purchases in a designated investment on evenly distributed intervals.
So, how is this an advantageous investing strategy?
Well, it provides investors, especially novice investors, an easy means to start out investing money for their future. It provides the discipline of keeping to a plan of putting aside a designated amount of money over long period of time.
Simply put, this method allows you to get more of an asset when prices are low and less of an asset when prices are high, thus providing a better overall entry price.
Why is that useful?
Because most people, not matter what asset they are investing in, seem to inherently want to do just the opposite; they want to buy when the price is rising and sell when the price is dipping. This is due to some emotional factors we will discuss later in this article.
So the short answer is, DCA helps to provide protection from entering into investment positions due to emotional bias.
This is also helpful to those investors who are risk averse.
Let’s be honest, investing in anything is risky…
So in order to be successful and properly allocate funds, you need to do so within the comfort level of risk that best suits you.
Now as strange as it may sound, many people reading this are already familiar with the concept of DCA and likely employ a form of this already.
I know, right now you’re thinking “wait…what?”
If you work a job, you likely are enrolled in some form of 401k or retirement plan…
And frankly, if you’re not, you should be if it’s offered to you… especially if your company offers some form of contribution matching.
So, in order to fund your retirement account at work, you likely have a set amount of money withdrawn from your check each pay period. This money is then funneled into predetermined mutual funds or the like. This is a form of dollar cost averaging.
Now you may be thinking that this form of investing makes sense since you are earning smaller amounts of money over a longer period of time… otherwise known as your paycheck.
But what if you have a larger amount of money you want to invest?
Let’s say you received a large bonus from your employer… what do you do with that?
Well, there are two obvious possibilities, invest in in the form of a lump sum or trickle the total amount over time.
So for example, let’s say you received an awesome $20,000 bonus from work. You’ve decided that you want to put this money to work for you (which is one of the keys to creating wealth).
For the purpose of this example, let’s say you’ve decided that you want to invest into a specific stock you’ve been eyeing.
If you decide to invest the total amount all at once, you would purchase the stock for the current market price.
At this point you’re “all in” so if you got in at a low price and the stock price rises, great, you’ve made money.
But if the stock price drops after you invest, then you’ve lost money.
Now, we realize this is a simplification of the “lump sum” form of investing… there are many other factors, the most prevalent of which is the amount of time you will be holding this investment.
Like all things, prices fluctuate… so what’s a loss today can be a profit tomorrow.
So, what is better, “going “all in” or dollar cost averaging?
Great question!
Though many people believe that DCA will provide the best “bang for the buck”… garnering a good overall entry price as well as lowering the level of risk by dripping you money into this asset in smaller amounts spread out over a period of time… however, there have been studies conducted which contradict this thought process.
Advantages of Dollar Cost Averaging
- Help Novice Investors Create a Disciplined Investing Strategy
- Start Investing With Small Amounts
- Good Average Entry Price
- Helps To Eliminate Emotion Based Investing
- Helps Mitigate Risk in Volatile Market Conditions
Disadvantages of Dollar Cost Averaging
- Studies Show “Lump Sum” Investing Creates Greater Long Term Returns
Crypto Cost Averaging
Recently, more and more people are choosing to add cryptocurrency as part of their overall investment portfolio.
For these adventurous souls, utilizing DCA as a method of investment will certainly provide them with plenty of opportunity regardless what cryptcurrency assets they choose to invest in.
Like most things in the crypto space, this Dollar Cost Averaging method of investing has garnered its own moniker…
Crypto Cost Averaging
One of the first places this identifier showed up was in a blog post on the ABRA Website.
On a side note… we love the ABRA wallet.
OK… let’s get back to the information at hand…
Crypto Cost Averaging is the cryptocurrency version of Dollar Cost Averaging.
Frankly, in our opinion it is a clever technique to deal with the highly volatile nature of cryptocurrency markets.
Advantages of Crypto Cost Averaging
While all the advantages listed earlier for DCA are definitely applicable in the cryptocurrency space, we believe there are some additional advantages for those who employ this strategy to the crypto investments in their portfolio.
Tips For Beginners To Cryptocurrency Investing
While you may not be a newbie to investing, you may indeed be new to cryptocurrency. Don’t feel bad, as of the writing of this article, less than 1% of the world population uses or invests in Bitcoin or cryptocurrency.
But like anything in this world, if you are not familiar or comfortable with something, you can tend to become overwhelmed easily.
Utilizing Crypto Cost Averaging can allow you to learn more about the crypto space, while just “dipping your toes in the water.”
As you learn more about a particular cryptocurrency or token project, you can decide if it warrants you investing more of your hard earned money.
Furthermore, the crypto space can be exciting to say the least.
As you start to delve more into forums and the like, you will often hear that things in the crypto space are accelerated… it’s like time goes by faster in crypto.
This is probably because unlike other traditional investment assets, cryptocurrency is a 24 hour per day, 7 day per week, global market.
It never stops.
Because of this, as well as individual investors varying levels of knowledge in the space, it is easy to get caught up in emotions. These emotional swings play out in many ways as we mentioned earlier… but the most common of these emotions are called FUD and FOMO.
Like many niches, crypto loves acronyms…
Honestly, neither of these is exclusive to the cryptocurrency space… but they are definitely well used here.
can be experienced with many things and at many points during life… it’s easy to become fearful or uncertain.
Just think about it, how many time have you doubted a decision?
If you’re like most human beings… plenty I’m sure…
So experiencing FUD is not something new and certainly not exclusive to crypto. But it does seem to be exacerbated by the space… just like time seems to move differently in crypto, so do emotions, they seem heightened to an extreme.
Unfortunately, when this happens, people can make very bad decisions, especially financially.
Thank you for helping us Crypto Cost Averaging!
FOMO is something that happens in all facets of life.
When it rears its ugly head in the crypto space, this is often when investors make poor decision about when to enter into an investment…
Like we mentioned above, emotional investors will often be buying a cryptocurrency when the price is rising, usually just before a sell off, and we know what that means… instant price drop.
Thank you for saving us Crypto Cost Averaging!
CCA Helpful For HODLers
If you are new to crypto, your first thought is probably… “hey buddy, you don’t know how to spell.”
And while that may be true… that is not the case here.
, sometimes referred to as Holding On for Dear Life, is another acronym popular in the crypto space.
It did indeed originate as a misspelling of the word HOLD in 2013.
It was posted in a Bitcoin forum and went viral in the space.
Now that we have that out of the way… you’re probably wondering how this fits into crypto cost averaging.
Well, not everyone in the cryptocurrency space is new.
Many people entered the space during the bull run of 2017 when Bitcoin reached a high of over $19,000 USD. It was at this point that many newbie investors decided to hitch their wagon to the Bitcoin bull.
A popular investment strategy during a bull run is to buy low and ride the price up.
That’s what many investors thought they would be doing… unfortunately the Bitcoin and cryptocurrency market had other ideas in 2018 as prices fell… in the case of some altcoins, the fall was over 90%.
Unfortunately, many peopled HODLed hoping for prices to return to the highs they had just experienced. As of the writing of this article, the bear market continues…
Enter Crypto Cost Averaging…
Those Bitcoin and cryptocurrency investors who had strong hands throughout 2018 and plan to remain in the space for the long term can use this bear market to their advantage.
A crypto investor using crypto cost averaging can acquire a large number of coins or tokens while the market prices are low, thus bringing down their average entry price for the asset considerably.
If you have HODLed from the top of the 2017 market highs to the current lows hit in 2018, Crypto Cost Averaging still provides you hope. If you truly remain in the market for the long term, you can worry less about the losses.
Disadvantages of Crypto Cost Averaging
Every investment method has its drawbacks and crypto cost averaging is no exception.
Time – A Double Edged Sword
One of the primary advantages of using this method of investing is that one of its greatest assets is time.
Unfortunately, this can also be one of its greatest disadvantages if not utilized properly.
I know, right now you reading this thinking… “this guy is talking out both sides of his mouth.”
Not true… let me explain…
Time is an advantage when you think long term.
You’re next question is… “what do you mean by long term?”
A legitimate question… let’s explore that…
In order to get a minimal advantage from this method, long term means that you plan to invest in the cryptocurrency space for a term of at least 5 years. Obviously, a longer span of time will of course be better.
So, if you do not plan to remain investing into your crypto asset for at least a 5 year period, than you will be doing yourself and your investment portfolio a disservice.
Let’s Pull It All Together
Dollar Cost Averaging is an investing method which can be utilized by anyone looking to start out putting funds into their wealth portfolio. This method is most useful for those investors who have only small amounts of money to invest and those who also have a long period of time to make these investments.
As you relate DCA to cryptocurrency, utilizing this Crypto Cost Averaging method to creating a crypto based portfolio can be extremely beneficial.
Crypto Cost Averaging helps an investor develop the discipline necessary to ensure consistent influxes of capital are injected into the designated crypto asset on a set time schedule. This helps an investor when dealing with the volatility within the cryptocurrency market, thus reducing risk.
Further advantages include risk mitigation when emotional investing can force newbie and veteran alike to make bad investment decisions.
Finally, this method of investment also gives hope to HODLers.
As of the writing of this article there is no bull run in sight… so using crypto cost averaging can help these investors gain a better average entry price, which in the long run will be to their betterment.
I would like to end this article with a quote from Warren Buffett; “Be fearful when others are greedy and greedy when others are fearful.”
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