Dollar Cost Averaging...Explained

You invest. You hold crypto, so it's obvious you do. If you don't know what Dollar Cost Averaging is, you better keep reading...

One of the best ways for a common person to passively invest in the stock market, regardless of which country's market it is in, is by DCA, dollar cost averaging. I first heard about this method about a decade ago and it has stuck with me as an interesting phenomenon.

Here's how it works:

At regular intervals, you buy a stock. As the price bounces up and down, you blindly buy at whatever the price is, but you keep the amount that you invest the same. What happens is that as the stock price goes up, you buy fewer shares. When the price is down, you buy more shares with the same amount of money. Your average cost per share will be a lower average because you'll have a higher number of shares purchased at the lower cost.

Example:
$100 every month for 6 months

Month 1Month 2Month 3Month 4Month 5Month 6
$25/share$20/share$15/share$25/share$10/share$13/share
4 shares5 shares6.66 shares4 shares10 shares7.69 shares
$25 avg/share$22.22 avg/share$19.15 avg/share$20.35 avg/share$16.86 avg/share$16.06 avg/share

This is usually a good thing because you don't have to time the market. The general idea is that you'll be investing in a company that is growing/expanding and that their value will go up over time. If you compare buying $600 of stock at the $25 price only, the average cost is, of course, $25 per share. However, spreading it out over time, you get the benefit of buying when it is down, too. If the stock only went up the whole time, you'd still have the benefit of having a lower average due to buying at the beginning at the lower cost. If it goes down the whole time, you gain more shares, lowering the average cost of the first purchase and the idea is that it will go up to being profitable again. Of course, if you get a loser company that never goes up, you're just wasting your money...however, generally speaking, people who are investing passively like this invest in index funds or exchange traded funds to limit their exposure to a company that sucks :)

I have another method of investing that I'm testing out. I don't know if it has a name, but until recently, there was no purpose to test out the idea. When I am done testing the theory out, which was inspired by Dollar Cost Averaging, I will make a new post about it. So far, everything has been promising, but I don't want to share it until I've nailed it down...on paper it looks amazing, but who cares if it doesn't work in real life, right?

Make sure you follow me here on the Hive/POB...You won't want to miss this...


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