Dollar Cost Averaging
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“Even if I knew that tomorrow the world would go to pieces, I would still plant my apple tree.” — Martin Luther
How many times have you heard, the market is going to crash tomorrow, wait, this isn’t the right time to invest. Fear should never drive you to make any decision, much less an investing decision. This is where Dollar Cost Averaging (DCA) comes into the picture. DCA is the ultimate discipline to be mastered to be a successful investor. Investing takes patience and discipline.
What is Dollar Cost Averaging?
Have you listened to your heart beat? It goes lub dub, lub dub, …lub dub, from the time you were in a womb, after birth, and as long as you are alive until you go the way of the flesh . If you are calm and rested, you heart goes at about 72 beats per minute. Same beat spaced equally in time.
Dollar Cost Averaging is very similar to the beat of your heart.
DCA is the discipline of buying a fixed dollar amount of a particular equity at fixed time intervals regardless of the price of the equity. More shares are purchased when the price falls and fewer shares are purchased when the price is high.
Why Should you Dollar Cost Average?
To minimize risk! If you have $12,000 to invest today and you put all of it into the market today, and the market falls by 10% in a month, then your portfolio would be worth only $10800. If you invest the $12,000 in $1,000 chunks once a month, then your investment would have fallen by 10% – your investment would have gone down in value by $120 instead of $1200. Secondly, you would be able to buy more shares for the same $1,000 in the second month when the market has fallen.
Bottom line, Dollar Cost Averaging is a hedge against a market crash.
How do I go about Investing?
I am a religious believer of dollar cost averaging. If I received $12,000 today, I would invest $1,000 every month for the next 12 months. While we seek to maximize investment returns, we should take every easy step to minimize risk. If you are new to investing, the best route for you would be to read – Betterment – Best ROI for your time and money. Start dollar cost averaging with Betterment.