Is dollar-cost averaging a good idea?

Investors are looking for various ways to maximise profits at the minimum risk. While it is not always possible, it might be worth getting to know different approaches and then deciding on which will work best for you. I am going to talk about the dollar-cost averaging strategy. You should not expect overwhelming gaining but the risk is pretty small.

What is the dollar-cost averaging?

The dollar-cost averaging (DCA) is the strategy that requires you to invest the same dollar amount in a specific investment during a certain period of time.

If, for example, you want to invest in a particular asset but you do not want to put all your money at once, you can choose the amount of money that you will be investing every month. It can be $100 or $300 every month, depending on your overall capital. The asset price changes from month to month but for you, it only means that you will purchase a different amount of shares.

Why is it worth doing the dollar-cost averaging?

The first reason is that thanks to DCA you will avoid bad timing investments. Imagine you put all the money on some crypto just before the price runs sharply down. Your loss will be huge. Now, with the dollar-cost averaging, you have invested just a small portion of your capital. On the other hand, you may as well miss out on the opportunity to invest right before the market rises high up.

Another advantage of using the DCA strategy is deleting emotional factors. You do not have to worry about what to do next or fear your decision was wrong. You do what you have planned beforehand which is to invest a steady dollar amount in the investment every month.

What kind of disadvantages does the DCA bring?

The price of the asset fluctuates up and down. However, over a longer period of time, the markets tend to move upwards. It implies that if you invested a bigger amount, you would earn more profit over time.

The DCA strategy makes you invest the same amount of money in the same investment over time. What if the investment is a losing one? Then you will be investing in something unprofitable. So it is important you choose the investment reasonably.

Also, you are not adjusting to the changes in circumstances. Even if you get the information that it would be very lucrative to invest in the instrument at this specific time, you should not increase the amount of money you invest. The DCA is based on the same dollar amount no matter the market situation.

Final thoughts

The dollar-cost averaging offers a quite passive approach where you invest a constant amount of money over time. It does not take the changing market conditions into account but it helps you to avoid big losses. It also removes from your shoulders the burden of controlling your emotions as you do not have to think about what move will be best next.

Remember that in the end, it is all about your money so the decision is yours. Maybe you want to avoid exposure to unpredictable market swings and the DCA is just the right solution. Maybe your experience allows you to use a more aggressive approach to get higher profits. Anyway, if you are interested in DCA, it might be simpler than you think. You do not need to know coding, we have prepared a basic DCA bot course where you can learn for free how to automate your DCA strategy.

Wish you successful investments!