Cost averaging\u00a0<\/strong>(DCA or dollar cost averaging) is an investment strategy for investing capital over time.<\/p>\n It can be especially valuable to beginners that chose their asset allocation<\/a> and preferred ETFs<\/a>, but still looking for an entry point for the actual purchase.<\/p>\n This post will describe one of the best and time-tested strategies of deploying your cash.<\/p>\n DCA<\/strong> (dollar cost averaging) is a strategy where an investor buys the same \u201cdollar amount<\/em>\u201d of some asset on regular intervals.<\/p>\n Dollar amount\u00a0<\/strong>means that the we don\u2019t think in terms of how many shares<\/strong>, but in terms of how many dollars<\/strong> (or any other currency).<\/p>\n Regular intervals\u00a0<\/strong>refers to the frequency of investing, which can be weekly, monthly, quarterly, etc.<\/p>\n As usual, a practical example can portray the strategy better than theory.<\/p>\n Let\u2019s say a person has a one-ETF investment portfolio to which he contributes regularly.<\/p>\n He earns $4,000 net per month and can afford to invest $1,000 of it.<\/p>\n On 25th of October<\/strong>, he receives his salary and immediately transfers $1,000 to his brokerage account. The price per share of the ETF is $10. It doesn\u2019t matter<\/strong> \u2013 he buys as much as he can with his $1,000.<\/p>\n On 25th of November<\/strong>, he receives his salary and transfers $1,000 to his account again. Meanwhile, the ETF performed great and its price is now $14. It doesn\u2019t matter\u00a0<\/strong>\u2013 he buys as much as he can with his $1,000.<\/p>\n So, it\u2019s not 100 shares in October and 71 shares in November.<\/p>\n It\u2019s $1,000 each month.<\/strong><\/p>\n As shown in the example above, Dollar Cost Averaging works really well for people in the workforce who can consistently save a portion of their income.<\/p>\n When I talk to \u201cregular people\u201d about investing in the stock market, I often get comments like \u201cwhen I save more money, I would\u2026\u201d<\/em>.<\/p>\n Instead of giving my opinion, I did a short simulation using the S&P 500 Periodic Investment Calculator:<\/p>\n Let\u2019s say a person invested $500 in an S&P 500 fund every month between 1992 and 2022 (30 year period). This means that the total amount invested\u00a0<\/strong>is $180k. But the\u00a0total portfolio value\u00a0<\/strong>after all the gains through the years would be:\u00a0$1,001,710<\/strong>.<\/p>\n You\u2019ve read it right \u2013 becoming a millionaire is easy even on average income, given a long enough timeframe.<\/p>\n Imagine what happens if you can invest a multiple of that.<\/p>\n The point?<\/p>\n You don\u2019t need to wait to build wealth to start investing in the stock market. It\u2019s quite the opposite \u2013 investing in the stock market will help you build wealth.<\/p>\n The most common fear of new investors is that the stock market will collapse right after they start to invest.<\/p>\n DCA solves that.<\/p>\n Actually, a market crash right after you start would be one of the best possible scenarios.<\/p>\n Think about it.<\/p>\n By starting with cost averaging right before a market correction, only the first months\u2019 investments will be affected.<\/p>\n This means that the rest of the contributions throughout the years will catch the inevitable recovery.<\/p>\n The single biggest benefit of implementing a cost averaging strategy is that it\u00a0completely removes the human factor from the purchasing decision.<\/p>\n It stops an investor of thinking that \u201cthe market is hot\u201d\u00a0<\/em>or that he\u2019ll\u00a0\u201cbuy more when it\u2019s cheaper\u201d<\/em>. It eliminates both the feeling of greed and the feeling of fear<\/a>. If left to the risk-averse human, he\u2019ll probably be stuck with a pile of cash<\/a> for a long time. This can make a major difference over the decades<\/a>.<\/p>\n The DCA strategy is planned upfront. The only \u201cnurturing\u201d it needs is adjusting the amount to match your current earning\/saving rate.<\/p>\n It also prevents beginners of putting themselves in risky financial situations. Situations where they save for years in order to make a major investment decision in an undefined moment in the future.<\/p>\n Remember, overperforming the market is not something that\u2019s \u201csolved\u201d. Nobody does it continuously.<\/p>\n So the best bet for most people is too ignore the price, invest frequently, and let time take care of the rest.<\/p>\n This post is Part 8 of the How to Start Investing Series.<\/em><\/p>\n \u00a0<\/p>\n Share This Post<\/span><\/p>\n \n \nWhat is Dollar Cost Averaging (DCA)?
\n<\/h2>\n\nCost Averaging Example
\n<\/h3>\n\nCost averaging\u00a0<\/strong>means buying assets at a\u00a0predefined frequency regardless of price<\/strong>.<\/h5>\n
\nWho is DCA for?
\n<\/h2>\n\nAddressing the Fear of Starting
\n<\/h3>\n\nBenefits of a DCA Strategy
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