Dollar-Cost Averaging (DCA) is a reasonably risk-free strategy of investing equal amounts monthly or weekly into stocks, shares, or cryptocurrency schemes to gain a long-term return on investment.
How Does it Work?
DCA allows you to invest a set amount of money on a scheduled basis to gradually build up asset ownership over time. This happens regardless of the asset’s value, meaning that the asset accumulation can vary depending on the asset’s value at the time of investment.
However, the idea is that it will build up the number of assets you have, whether this is stocks, business shares, or cryptocurrency coins, so that the average value at the end of a term will come out as higher than you initially invested.
So, Why Use Dollar-Cost Averaging?
DCA is a great way to start an investment scheme, especially if you’re new to investing and are unsure where to start. It does bring many benefits and is considered one of the safest ways to start an investment portfolio.
The Pros
- Low-Risk
Because you’re growing your asset ownership month on month, the strategy is fairly low risk. Even if the market drops, you’re still guaranteed your assets at the end of your term, and all you’d need to do is wait until the market rises again to sell.
In addition, because you’re continually growing your assets, your return on investment will typically come out higher than the amount you’ve invested as, despite dips in the market, most assets do gain value over time.
- No Need for Big Bucks
Monthly investment is the way to go if you don’t have a wad of cash to invest. It’s money that you can set to come out of your bank account each month at an amount that suits you.
Because of the long-term aspect of DCA, it doesn’t take a massive cash injection to come out with more money. If you’re investing through your workplace on a business shares or 401 scheme, the funds will likely be taken from your paycheck before you get paid, so you won’t even notice it’s gone.
- Long-term
DCA is a long-term investment strategy, so there’s no need to keep a constant eye on where the market is. It’s a great way to start for a beginner, so you don’t actually need to have previous experience or knowledge of the changing market to make money.
From a return-on-investment perspective, you could think of DCA as a bank account, gaining steady interest all the time. However, it earns more money than most bank accounts and gives you ownership of more assets as you invest your money, so it’s a win-win.
- Easy for New Investors
It’s a great way to start on your investment journey as no prior knowledge of investments is required, and the low-risk format means that, even if something does go wrong, it won’t break your bank.
Think of DCA as a great learning exercise where you can get used to the market fluctuation and gain more knowledge without putting anything too critical on the line.
- Reduces Emotional Buy-in
DCA allows for a more casual perspective of investment. Because you only pay a small and set amount that you’re comfortable with into your investment pot on a schedule to suit you, there aren’t any high stakes involved.
Lump-sum investing usually needs a quick turnaround with high stakes and investment to make a decent return, and you have to watch the market constantly for changes to know exactly when to pull your money out.
Overall, DCA is less risky and less stressful, so the emotional buy-in and constant refreshing of stats aren’t needed.
The Cons
As with any investment strategy, there are some downsides, but luckily, not all that many.
- Relatively Low Return on Investment
In comparison to more high-risk strategies, DCA doesn’t provide high returns. You’re not going to invest $10 and come out with $10,000 within a few weeks.
However, because of the value that you’re adding month on month, you’re still likely to come out with a decent return with a lot less risk. With lump-sum investing, you could earn much more money, but equally, if the market crashes, you could come away with less than you invested. If you’re looking for instant cash, this isn’t the investment strategy for you.
- Long-term Strategy
Being long-term could be a good or bad thing, depending on how you look at it. If you’re looking to squirrel some money away for a rainy day, or you want a bit of extra cash for something special, then DCA is the right scheme for you.
However, if you need a fast turnaround with a high payout, you might be disappointed.
Is Dollar-Cost Averaging a Good Investment Strategy?
Dollar-Cost Averaging is an excellent strategy for long-term investors looking to make a decent return on their investment for the future. It’s an easy-to-use method that requires little to no investment experience and will work across multiple investment platforms.
The strategy works within workplace share schemes, where you may be able to buy a share in the business where you work to sell later on when they’re more profitable – that way, the way you work is in direct correlation to your investment success.
Some businesses also offer 401 schemes. Both of these investments can work directly through your workplace with no input from you until that payout comes.
You could also invest in stocks, assuming the stock market fluctuation will eventually increase the value of your stocks. Cryptocurrency also works exceptionally well with DCA as it’s easy to monitor multiple currencies at once.
This is a way to gamify your lower investments if you want to get a little more emotionally involved. Bitcoin and Dogecoin are currently doing incredibly well, and they hold global value, so investing now is a great way to secure your future.
Is Dollar-Cost Averaging the Best Way to Invest?
The best way to invest is entirely dependent on what you want to achieve from your investment. If you’re looking for a big cash payout on a fast turnaround, then it’s probably not one for you.
However, if you need a longer-term investment that makes more money than the interest gained on a pension scheme or bank account, then DCA is ideal. It’s low-risk and can give high returns depending on what you put in.
The great thing is the more you invest, the more value you own, and the more you’ll get out of your investment. So this accumulative way of investing gives you much more for your money on a long-term basis.