Dollar Cost Averaging (DCA) as coined by Benjamin Graham is a common investment technique that involves investing a fixed sum of money, typically over a period of time, in order to increase the average return on your investments. This is done by dividing the total investment fund into the number of months you want to be investing and depositing the funds into the asset over the said period of time. Many investors miss out on assets due to waiting for the perfect time of investment which is likely the bottom. Finding the bottom of every market can be incredibly difficult. It is no mystery that, no one can really predict markets and as such the best strategy investors go with is trends and averages. It is in this regard that such a technique was developed.
As a tool, it possesses tremendous benefits which I will outline here. First and foremost, DCA enables one to build Wealth Slowly and Safely. Many investors join a market on the whims of emotion while the talented join based on technical analysis. Both of these entry point tools don't guarantee 100% safety as no one can accurately predict the bottom or top of a market. The past 10 years in the cryptocurrency have shown the longest bull markets have lasted for barely a year. The bear market on the other hand typically lasts for 3 years. No one really knows how low cryptocurrency assets can go and entering a market on the go is a big bet even when you have a perfect technical analysis. As such, the majority of individuals enter the market when it's at its top and exit it without patience when it's at its bottom. Dollar Cost Averaging is the golden strategy to use to avoid such a trap.
With the dollar cost average, since your investment fund is divided over a period of time, your entry point becomes an average of price actions over a period of time, and in a downward trend, you tend to be shielded against greater losses. It is therefore a sure way to build wealth slowly and safely.
Secondly, DCA helps to mitigate unnecessary risks. One of the main risks of investing a large sum of money in a single investment is that you may lose money if the investment fails to perform as expected. When the dollar cost averaging strategy is rather utilized, one spreads investment over several different timelines. This helps to reduce your overall risk by ensuring that you will not lose a lot of money if you entered at the top as you have more funds to accumulate more of the investment.
Finally, DCA reduces the risk impact of market fluctuations - One of the biggest risks in any investment portfolio is the risk of losing money as a result of a sudden market downturn. A sudden market downturn can be caused by negative economic developments, political events, or even a natural disaster. The current market conditions can be attributed to COVID-19 and the Russian-Ukrainian war. The response to the war has been a downtrend to all assets be it crypto, stock, real estate, or what have you. Any investor who had invested a huge sum of money when crypto was at its all-time high will be in a massive loss right now. But with DCA, an investor would still be entering the market reducing his entry point and setting up a good return position for the next bull run.
NB: This article is not for financial advice in any way and one takes responsibility for using this strategy. Do your own research. Peace out.
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