Dollar-cost averaging strategy implies that you invest the same amount of money in the same financial instrument over a specific period of time. While this has many advantages there are also some disadvantages you should be aware of. What can they be? Let’s discuss them in today’s article.
Dollar-cost averaging basics
It is nearly impossible for an average trader to time the market correctly. Even for professionals is not always an easy task. Many factors influence the price behaviour and not all are predictable. This is one of the reasons why dollar-cost averaging is convenient. Here you do not have to time the market right cause you predefine your investment no matter the stocks prices.
Another thing is that we often do not have such a big amount of money to begin trading. Dollar-cost averaging requires much smaller money as you invest every month some certain quote.
Moreover, the emotional component is removed. In traditional trading, emotions often take control and make us take decisions that we would never take otherwise. There is fear present, and anger, anxiety, or overexcitement. These are strong feelings that cloud our reasoning. In the dollar-cost averaging method, you just follow your plan of investing a fixed amount in a specific stock periodically.
As it all sounds very promising, there are some disadvantages of the dollar-cost averaging approach and now we will take a look at them.
What are the disadvantages of dollar-cost averaging?
The first thing is that you should continue investing even when the circumstances are not beneficial for you. It is easy to buy stocks in the months when you see the investment would probably bring nice profits. It is more difficult to do it when the market goes down. You may be tempted to stop investing on such occasions but this is exactly the point of timing the market. In dollar-cost averaging, you should continue investing no matter the market conditions.
You should choose the asset wisely. Make a profound analysis. Some investments will not be profitable. If you continue investing in them, they will bring you only losses. So it will not help you if you put money into bad investments.
Another issue is that you should choose the investments that make sense for the dollar-cost averaging approach. Some will simply not serve this purpose. You should focus on these that are good for long-term perspective and cost-effective. If this task seems too difficult to you, there are other options. You may invest in country indexes such as the S&P500 in the USA, the Hang Seng Index (HSI) in Hong Kong or the Straits Times Index in Singapore, or you may also use cryptocurrencies like BTC or ETH. The latter, cryptocurrencies, are what we find most attractive.
You invest regularly a certain amount of money in dollar-cost averaging. What if you have a big capital at the start? Then, it may be a bit unfavourable for you to use this strategy. Why? Because you will invest a small portion of your money and the rest will simply not make any profits. Instead, it will be losing due to inflation. Naturally, putting all your money into one transaction will not be the best choice either. But you should think about the potential profits the bigger amount could earn and think whether dollar-cost averaging is the best option in your case.
Lastly, I want to mention that you should be aware of the fact that with good market timing you could gain possibly higher profits. If you had been able to predict price swings, you would have earned a fortune. Getting in or out at the exact right moment is what brings the most money. And dollar-cost averaging excludes such an opportunity.
Dollar-cost averaging may be very beneficial there are, however, some disadvantages to this method. You should get to know yourself and your skills well and decide what kind of investments would be best for you.
Before you start investing answer honestly how big is the capital at your disposal. Whether you are able to time the market correctly. Are you an expert or do you have an access to information on when exactly to get in or out of the market? Are you in control of your emotions or are they easily taking the lead?
I am sure our free course will help you get started. Explore our course on automating DCA strategies for cryptocurrencies. This knowledge will allow you to start trading with a trading bot. It will make your investments easier and your emotions will not get in the way of your trading.