Dollar Cost Averaging 101
Many of the brightest minds in the investing world share one common trait: they recommend dollar cost averaging (DCA) as an investment strategy. But what is dollar cost averaging and how does it work?
Here's Dollar Cost Averaging 101!
You’re not going to get rich renting out your time. You must own equity - a piece of a business - to gain your financial freedom.
— Naval (@naval) May 31, 2018
Now, I'm Not advocating blind DCA into anything. But for your high conviction, long-term bets, yes.
Dollar cost averaging, or "DCA" for short, is a simple investment strategy in which an investor splits the total amount to be invested in a given asset across regular periodic purchases. The regular purchases occur regardless of price, volatility, or economic conditions.
The goal is to remove the complexities of market timing from the process, allowing an investor to build their desired position without concern for external factors. Its simplicity removes behavioral and psychological biases from the equation. Let's look at an example.
Imagine you want to build a $10,000 position in bitcoin. You have done your research and believe in the long-term story. You aren't sure if it will go up or down in the near-term, so you decide to dollar-cost average. Great decision! How will you do it?
You split the $10,000 up into 20 pieces ($500 each). You could have done any number of pieces, but 20 felt right. You decide on a weekly DCA, so every Monday, you buy $500 of $BTC, regardless of price. After 20 weeks, you have built your desired $10,000 cost basis position.
You could do better, let's say you purchase $500 every week for 1 year (Total: $26,500). If you started from a year ago, your total value is now $32,293. Up 21.86%.
Alternatively, you may not have a specific position size in mind. You know you believe in the long-term story for $BTC, but you aren't sure about near-term movements. You are confident it's going (much) higher eventually, but with likely volatile swings between now and then.
In this scenario, you may go with a "perpetual DCA" plan. Just buy a set amount every day, week, or month, with no position size in mind. This is an excellent approach for high-conviction, long-term investments. (Note: Perpetual DCA is the backbone of my personal strategy.)
For the vast majority of investors, dollar-cost averaging and compounding are the two concepts that should form the foundation of your long-term wealth creation strategy. DCA + Compounding = All You Need The best part? It's easy. Anyone can do it.
There are many great tools that allow you to automatically execute against your dollar-cost averaging plan.
I don't know exactly why, but the following blog post have been getting lots of attention recently, check it out or you might miss something important:
There are many experts out there that seek to over-complicate things. As you all know, I am not one of them. In investing, as in life, keep it simple! Dollar-cost averaging + compounding = all you need.
So that was Dollar-Cost Averaging 101!
I hope you found it useful.