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November 25, 2024
“Buy low sell high” is something that every investor hears, typically early in their investing journey. They may try to duplicate this and there are times when this advice causes investors to wait for a drop in prices, thereby potentially missing out on a continual rise during a bull market. This is one way that investors get lured away from the markets and become tangled in the slippery slope of trying to time the market. As discussed in our last investing article, market timing is not advisable for a long-term investment strategy.
Today we will examine one investing strategy that seeks to counter our desire to time the market by canceling out some of the risk involved. This strategy is called Dollar Cost Averaging (DCA).
With DCA, a set amount of money is invested at regular intervals. Common intervals include weekly, monthly or quarterly. DCA is generally used for more volatile investments like crypto currency and stocks. Many investors may practice DCA without realizing it, especially if they contribute to a retirement plan like a 401K where deductions from paychecks are made monthly to invest into the market.
Passive investors love DCA because it reduces timing risk, which is the likelihood you’ll buy at the peak, right before the market falls. Instead of investing a large sum of money at once, DCA allows you to invest smaller portions at different times, lowering the risk of any single large market move by spreading investments out over time.
Using data directly from Binance, the largest crypto currency exchange, we can see exactly what happens when DCA investing $100/month into bitcoin over a four year period. At the end of this period, you would have invested $5,000, but netted over $22,000 simply by buying small increments at a time! This is a 551% return on investment!
DCA strategies are most effective when investments are consistently made over a long period of time. Setting the time to manually trade can be challenging, so use automation tools to make things easier for yourself. A platform like Satoshi’s Index allows you to not only invest in Bitcoin, but other popular cryptocurrencies.
In our next investing article we will examine how to maximize long term returns using a diversified DCA approach that can double the return of Bitcoin.
Let us know how we can help you!
