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  • Dollar-Cost-Averaging (DCA) explained – THIS IS WHAT YOU NEED TO KNOW!
  • Dollar-Cost-Averaging (DCA) explained – THIS IS WHAT YOU NEED TO KNOW!

Dollar-Cost-Averaging (DCA) explained – THIS IS WHAT YOU NEED TO KNOW!

The dollar-cost averaging strategy

Many investors are busy with their shares on a daily basis . The goal is to sell a share at a good point, before the prices fall again. The market is unpredictable and it is practically impossible to know when the prices will fall. Being so actively involved with your shares takes time and can cause a lot of worries and stress. If you would rather not be actively involved with your investments, dollar-cost averaging can be a solution. 

In this article we will discuss a strategy called ‘dollar-cost averaging’, or DCA for short. This strategy is aimed at the long term, with lower risks. A kind of entry-level model for investors.

What is dollar-cost averaging?

Dollar-cost averaging is a method of reducing volatility when purchasing investments (usually shares). This is done by purchasing the same amount of shares on a regular basis .

The reason for this is that regular investing spreads the purchase price over a period, instead of buying a lot at once. This gives you more control over the volatility of the market. The result in the long term is that the risk of ‘getting in at the wrong time’ is reduced.

Why should you use DCA strategy?

As mentioned, you buy your shares at multiple times. You enter at multiple times, which reduces the risk of entering at the wrong time. The market is unpredictable and your strategy can be as good as it gets; an incorrect entry time ruins the investment. By means of the dollar-cost averaging strategy, you can suppress this risk.

You divide your investment into multiple shares, which means that at the end of the ride you will get a higher return on your investments than if you had bought it all at once. An investment that you make at the wrong time will result in a lower result and because the market is so unpredictable, a mistake is easily made. You can also prevent mistakes from being made when making choices, because DCA makes the decisions for you.

Marginal note

However, keep in mind that a strategy does not eliminate all  risks  and cannot completely eliminate the intended risks. Investing is and will always be a risk! The point is that the entry moments are spread, which reduces the wrong moments. The dollar-cost averaging strategy does not guarantee a successful investment, but helps you reduce one of the risks. It is best to use DCA in combination with or as part of other strategies.

As mentioned before, the market is volatile and unpredictable. This makes it difficult to predict when you can get in at the right time. DCA helps you get in, but you also have to think about how you will get out after a while. Even then, you can run the risk of getting out at the wrong time. Think about an end goal for yourself and when the price comes close to that goal, you start selling. You can also do this in a few steps. This spreads the risks and you do not lose everything at once. However, this does depend entirely on your personally drawn up investment strategy. An example of such a strategy is the  buy & hold strategy , where you keep your shares for a very long time, without touching them much. The philosophy behind it is that in the long term the investments will have increased significantly in value.

Example DCA

We will explain DCA further by means of an example. To start, we are going to invest a fixed amount of €10,000. The price looks fairly stable and we do not expect this to change much in the near future. We want to get in by means of the DCA strategy. We divide that €10,000 into 100 pieces of €100, whereby we buy a part every day. In this way, we spread the entry moment over a month or three.

The argument against dollar-cost averaging

DCA sounds promising and is a good strategy that can significantly reduce risks. But investing always remains a risk! There are also counterarguments to the dollar-cost averaging strategy. Sometimes, for example, it may have been better to invest a lot at once, in order to get a better return in the long term. In this case, dividing the investments can actually result in a reduced profit. DCA would then have a weakening effect on the return.

It is also the case that many investors cannot invest a lot at once. Distributing the investment is then more suited to their situation and wishes. After all, you should invest with money that you can really afford to lose.

Finally

In short; if you want to reduce the risk of getting in at the wrong time, DCA is a suitable strategy. You divide your investment into multiple purchase moments, which spreads the risks. The big advantage is that you do not have to keep a close eye on the market. So you do not have to decide and plan in advance when to make an investment. Although there are sceptics who say that the return in the long term is lower than if the investment had been made in one go, DCA is a good strategy to get in on a price.

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Do you want to start buying shares? Then you need the software of an online broker. Via an online trading platform you can execute orders yourself. Find a broker that suits you:  compare brokers !

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