{"id":354332,"date":"2022-07-12T20:34:08","date_gmt":"2022-07-12T12:34:08","guid":{"rendered":"https:\/\/www.ziet.co\/v2024\/?p=354332"},"modified":"2024-11-07T10:47:28","modified_gmt":"2024-11-07T02:47:28","slug":"dollar-cost-averaging","status":"publish","type":"post","link":"https:\/\/www.ziet.co\/v2024\/investing\/dollar-cost-averaging\/","title":{"rendered":"Dollar-Cost Averaging"},"content":{"rendered":"\n

<\/path><\/svg><\/span><\/span>Estimated reading time: <\/span>8<\/span> minutes<\/span><\/p>\n\n\n

\"\"<\/figure>\n\n\n
<\/div>\n\n\n\n

Dollar-cost averaging is sort of like a fool-proof strategy that most seasoned investors recommend. However, have you stopped to really think about what it really entails? Well, in this article, I will be explaining exactly what DCA is and how you can utilize this strategy to the fullest. You don\u2019t have to be an advanced investor. I\u2019ll break it down so that complete beginners can understand!<\/p>\n\n\n\n

Let\u2019s say you have some money right now and you want to invest in a particular stock or ETF, but the market conditions are looking shaky, and you have no idea where to begin. So, the ultimate question remains. Should you buy the stock right now? Or maybe split your purchases over-time? In this article, I\u2019m going to answer just that.<\/p>\n\n\n\n

<\/div>\n\n\n\n
\n

TABLE OF CONTENTS<\/strong><\/h3>\n\n\n\n
    \n
  1. What is Dollar-Cost Averaging (DCA)<\/a><\/strong><\/li>\n\n\n\n
  2. Why Should You DCA?<\/a><\/strong><\/li>\n\n\n\n
  3. Dollar-Cost Averaging Tips<\/a><\/strong><\/li>\n\n\n\n
  4. Conclusion<\/a><\/strong><\/li>\n<\/ol>\n<\/div>\n\n\n\n
    <\/div>\n\n\n\n

    1. What is Dollar-Cost Averaging (DCA)?<\/strong><\/h3>\n\n\n\n

    To put it simply, Dollar-Cost Averaging (DCA) is a risk management strategy so that you can invest your money in the stock market, without taking on excessive risk at any given point in time.<\/p>\n\n\n\n

    Example<\/strong><\/h4>\n\n\n\n

    An investment of $100,000 in stocks using the Dollar-Cost Averaging strategy can be made over 12 purchases\/weeks\/months (depending on your personal circumstances) in subsequent order. Here\u2019s an example that illustrates the trades for DCA strategy using Apple (NASDAQ:AAPL)<\/a>:<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    Dollar-Cost Averaging Example<\/em><\/p>\n\n\n\n

    In the table above, I\u2019ve theoretically invested ~$10,000, in each category, into AAPL. The first table illustrates the results of Dollar-Cost Averaging (DCA); whereas the second table illustrates the results of lump sum investing. As you can clearly see, you\u2019d fare much better if you utilized the Dollar-Cost Averaging strategy when investing in AAPL in early 2022. The DCA strategy performed almost twice as well (-10.55%), as compared to lump sum investing (-18.30%).<\/p>\n\n\n\n

    2022 hasn\u2019t been a good year for the US economy thus far, where the S&P 500 had declined<\/a> 18.7% (as of the writing of this article). Taking this into account, Dollar-Cost Averaging will be able to provide better returns as compared to lump sum investing, in order to minimize the risk of each investment.<\/p>\n\n\n\n

    <\/div>\n\n\n\n

    2. Why Should You DCA?<\/strong><\/h3>\n\n\n\n

    a) It takes the emotion out of investing.<\/strong><\/h4>\n\n\n\n

    Using your emotions in investing could be one of the worst, if not the worst things that you can do. It affects your buying & selling decisions. Humans tend to be greedy when the market is at its peak and fearful when the market crashes. It\u2019s totally natural, in fact, that is what you might call a \u201cfight or flight<\/a>\u201d response.<\/p>\n\n\n\n

    <\/div>\n\n\n\n

    b) No one can time the market.<\/strong><\/h4>\n\n\n\n

    There are only 2 outcomes whenever you buy into a stock: either it goes up or it goes down. Fund managers would argue that they are really good at market economics as they have different tools, market intelligence, formulas, as well as calculations to time the market. That\u2019s true, only to a certain extent. There are many reports & studies, such as this one from CNBC<\/a>, suggesting that almost 80% of active US Fund Managers underperform against the S&P 500 Index.<\/p>\n\n\n\n

    These fund managers have what seem like unlimited resources, proprietary information, huge teams, etc., and many of them could not outperform the index. If the majority of fund managers could not outperform the index, what hope is there for retail investors?<\/p>\n\n\n\n

    A vast majority of retail investors have full-time jobs and other commitments to attend to, which makes it even more difficult to outperform indices such as the S&P 500 Index that has an annualized return of 10.67%<\/a> since its inception in 1957.<\/p>\n\n\n\n

    If you are still not convinced, there\u2019s a really well-written article called \u201cEven God Couldn\u2019t Beat Dollar-Cost Averaging<\/a>\u201d, that I highly recommend for you to check out.<\/p>\n\n\n\n

    <\/div>\n\n\n\n

    3. Dollar-Cost Averaging Tips<\/strong><\/h3>\n\n\n\n

    Here are some of the tips that I personally use to fully-optimize my DCA strategy. Do note that this is my personal preference and should only serve as a guidance, rather than the \u201cbest way\u201d to DCA.<\/p>\n\n\n\n

    a)<\/strong> Dollar-Cost Average into Good Companies.<\/strong><\/h4>\n\n\n\n

    Personally, I would recommend Dollar-Cost Average to companies that I know will do well in the future. Always do your research before investing into any company. Projections and promises will likely differ from reality; therefore, data & facts will be crucial in this regard. If you\u2019re looking for information for ETF investing, you can check out my other article here<\/a>.<\/p>\n\n\n\n

    A \u201cgood\u201d company to me, can be defined as such:<\/p>\n\n\n\n

      \n
    1. Increasing Profits<\/strong> \u2013 Consistent profitability (ideally with growth) is one of the most crucial aspect of any business. Positive and growing free cash flows, earnings per share (EPS) etc. are some of the key ratios to measure a company\u2019s profit.<\/li>\n\n\n\n
    2. Low Leverage<\/strong> \u2013 Low leverage indicates that the company is able to generate profits while maintaining the profit margin without the need to be over-leveraged (i.e. take on too much debt), as that can put the company in a risky position financially. A general rule of thumb would probably be a debt to equity ratio of not more than 2.0.<\/li>\n\n\n\n
    3. Has a Business Moat<\/strong> \u2013 To ensure that their products are well-received and has some proprietary quality that cannot be easily disrupted by competitors. Most successful companies like Apple, Google, Tesla and Amazon have a strong business moat that cannot be replicated easily by its competitors.<\/li>\n\n\n\n
    4. Good Management<\/strong> \u2013 Crucial to the success of a business as the integrity, intelligence and adaptability of a business manager can determine the course of the company\u2019s future. Think of the CEOs as your business partners \u2013 would you trust them to run your business?<\/li>\n<\/ol>\n\n\n\n
      <\/div>\n\n\n\n

      b) Splitting the Investment into 3 Purchases.<\/strong><\/h4>\n\n\n\n

      This essentially means dividing your investments into 3 parts. For example, if you\u2019re looking to invest $6,000 into Tesla (TSLA), try your best to split it into 3 increments, at $2,000 each.<\/p>\n\n\n\n