It can always be difficult finding enough money to scrape together to start saving or investing. You may be wondering what even is dollar cost averaging (DCA) and why should you even care? Well it’s important to put your money into a place that will grow it, instead of sitting in a low interest rate bank account or under your mattress.
Well, if you are already investing in a 401k every month, you’re using dollar cost averaging. It’s a strategy that works and helps you invest in the market at your own pace.
So What Is Dollar-Cost Averaging?
It’s an investing strategy where you break up the total amount you want to invest into monthly installments. Instead of one big chunk of money entering the market, you’re doing a monthly reoccurring deposit into the market.
This breaks up the risk and reduces the volatility on large purchases. No one can time the market perfectly, so it’s important to invest as often as possible. Instead of aiming for your target stocks to drop in price, you get your monthly allotted amount of dedicated investing money and immediately invest. Some months you would invest when the stock is on a new high, other months you’d invest when it hit new lows. It averages out and lets you get a good average return rate.
If you wait until the stocks you want to invest in hit your target enter price, you’ll already be ready to retire. You never know when that would happen and it’s better to just get your money invested and let compound interest take effect.
Stop Trying to Time the Market
It’s a known fact trying to time the market is a sure-fire way to lose. As a beginner investor, it’s almost impossible to find the right target price to begin investing. It’s easy to look back and wish you entered the market at a certain point several months ago. You just don’t know when the right time will be. However being in the market is better than not being in it at all and still waiting to time it correctly.
I wish I entered Bitcoin last year when the price was so much cheaper, but at least I am in it and had an average return of 35% so far. It could have been close to 300% but I invested when I was able to and I benefited from it. There’s no point in looking back and regretting something that is out of your control. Just keep moving forward.
The Pros of Using Dollar-Cost Averaging
It can be so easy to just put all the money you can into the market, hoping you caught it at the right time, but like I said, you just don’t know when the right time will be. Dollar-cost averaging is a great way to invest during volatile periods in the market.
During these times stocks may fluctuate hundreds of points a day, making it very difficult to find the right point of entry. Having your set amount to invest will let you automatically invest and walk away, letting compound interest do it’s thing. The market will stabilize and you would be moving onto the next investing period.
Another benefit of DCA is it takes out the emotional factors of investing. If see everyone running to a new hot stock, you follow suit. It’s only natural to feel FOMO and just throw your money into that new trend. Or you may see a stock falling and everyone begins selling off. Again, you follow everyone else and get caught up in this emotional rollercoaster called investing.
Relying on consistent investments let you put your money into your investment account and never worry about what else is happening. You know exactly how much you’re investing and when you’re going to hit the “buy” button.
How To Budget for Dollar-Cost Averaging
So you want to start implementing the dollar-cost averaging strategy. But now you need to figure out how much money you are able to invest and over what time period. If you are investing in a 401k, you’re already utilizing this strategy.
Look over your paychecks and your monthly spending and find areas you can either cut or ways to grow your income. That’s the first step. Second is to look at the money you may have already saved and see if you can lower the amount saved and increase the amount you can invest. Find the right amount so you are saving enough to live off and cover any emergency costs.
Whether it’s $20 from each paycheck or $100, whatever you are comfortable investing with and it won’t hurt your daily living style, you’re good to go with starting your dollar-cost averaging strategy.
So the next step is to decide how much you want to invest in a particular stock or fund. Then figure out the time periods for investing, whether that’s weekly, monthly or something in between.
Is Dollar-Cost Averaging Right For You
Most of the time I would say, yes, dollar-cost averaging is right for you. Investors just starting out will need to pace themselves because it’s easy to get sucked into the world of stocks. There are so many new shiny stocks popping up and will want to try investing in them all. But having a game plan and a set period of investing intervals, you can avoid getting distracted.
If you are easily influenced by others or what you see others are doing, it’s easy to fall into the traps of FOMO and follow suit. If people start panicking, you’re likely to panic too and sell off your stocks. Dollar-cost averaging will let you ignore all the buzz around you and stay focused on the prize.
It’s a great investing strategy that I utilize and encourage others to do the same. Every 2 weeks I invest a set amount into my portfolio. If I find some extra cash lying around I will invest in some stocks I’m interested in, but that is lowest on my list of priorities in investing. Building up my foundation and position in stocks is more important. Steady consistent investments will help me reach my goals.
