There are different strategies when it comes to taking profits at the markets. Dollar-cost averaging is one possibility. Investors will invest regularly a fixed money amount over a specific time period. It may bring pretty good results as timing the market is an enormously difficult task. Trading is based on buying low and selling high. But it has to be done at a precise moment or you do not earn too much. Or even lose. The markets behave often unpredictably and there are so many factors that may influence what is going on with the price of the underlying instruments. So the question for today is: what is the best way to dollar-cost average?
Dollar-cost average rules
Dollar-cost average strategy is quite straightforward. You decide on the amount of money and you invest the exact amount in a particular asset periodically, for example, every month. You do not get to worry about price fluctuations cause you have already specified how much and how often you will invest.
Dollar-cost average strategy means you will purchase a different number of shares each time. The shares price will vary but you invest the same money so in some months you will be able to buy more than in the others. Nevertheless, in the end, the average cost should be similar to the one made when trying to time the market.
You may discover that over time the average cost per share has reduced significantly. This is due to purchasing a lot of shares when their price is low.
Dollar-cost averaging may be attractive to people who do not have big capital just yet. It allows beginning investing even with limited funds. And in the long perspective, it offers the possibility to build wealth.
Let’s assume we have an investor who decided to invest in ABC cryptocurrency. In January he purchased his first units for $1,000. The unit cost was $20 which means he has bought 50 units.
In February the ABC cryptocurrency cost $16 per unit which gave him 62.5 units. In March $12 (83.3 units), in April $17 (58.2 units) and in May $23 (43.48 shares).
Our investor kept buying ABC cryptocurrency units for $1,000 every month. From January to May he has spent $5,000 and has purchased 298.14 units. The average price was $16.77. According to the current prices, his investment of $5,000 has turned into $6.857.11.
What would happen if he wanted to invest all $5,000 in one trade? We do not know that. He could have won more, but he also could have lost all. With a DCA strategy, he slowly managed to generate profit. This is a definitely less risky approach.
Decide on the amount of money you can invest and make your long-term plan. Cause dollar-cost averaging is a long-term strategy. The markets are moving up and down temporarily, but in a long run, they tend to keep a steady direction. If you would rather invest short-term, DCA might be not for you. Markets may continue to be bullish or bearish for a long time, months or years even, and that is why this strategy requires long-term investments.
Just stay with your investment through worse times. Usually, the prices do not change drastically from month to month, so the average share price should be beneficial in the end.
Check our free DCA course which offers the basics of automating your dollar-cost average investments. You do not have to be an expert in coding to be able to use DCA!
Wish you success!