How to avoid or significantly reduce your investment losses when investing? Let's take a closer look at how DCA works and why you might seriously consider using this strategy.
What is DCA - Dollar Cost Averaging
This is an investment strategy, the main point of which is to regularly (for example, every month or once a week) buy a specific type of investment (for example, shares of company X) spending a fixed amount of money. In doing so, you should not take into account its current value (it can be low or high).
This way you can flatten the price by buying at regular intervals compared to a one-time payment. This is called reducing the volatility of an asset when entering the market.
Why does the Dollar Cost Averaging technique work?
Stock market fluctuations occur every day and it is difficult to predict short-term fluctuations. An investor can make a mistake and accidentally make a purchase at the highest price and wait a long time for the market to return to this level.
Thus, the average price per share is getting lower and lower.
This strategy reduces the risk of investing large sums in one security at the "bad" time.
After all, determining the best time on the market is one of the most difficult decisions when investing. It is easy to make a mistake and buy a stock at the wrong time, and it usually leads to negative results.
You also can set this strategy and don’t invest manually. Thus DCA is a great way to simplify your life. Simply set your DCA and automatically allocate your funds upon each deposit.
Who is the Dollar Cost Averaging technique suitable for?
- The investor is limited in funds and invests small amounts
- When buying accumulative insurance
- With monthly deductions to RRSP
- When the market falls
- If the investor does not have enough knowledge or time
- For investors who do not like to take risks
How to Invest with a Dollar Cost Averaging Strategy
I advise you to divide your investment into equal parts and start buying and then selling positions gradually, regardless of the price. This way, you can reduce the risk of not quitting at the right time.
Are there any disadvantages of the Dollar Cost Averaging Strategy?
There are also arguments against this strategy. Some believe that averaging the dollar value can lead to loss of profits during a bull market. But considering all of the above, this likelihood of losing part of your investment is not a reason why you should avoid the DCA strategy, as it can be useful and effective for many other traders.
Do you have any investment experience? Share your opinion in the comments below! If you wanna learn more or know more you can contact my team or you can jump into a one-on-one call with me right now clicking one of the the below buttons.
He uses to dedicate part of his life to inspire others and help them achieve the most out of their lives. Since he was 20, he had successfully founded and managed several companies operating in the field of management consulting, wealth management and fintech. He is Member of Institute of Directors in London, Member of Changer Club in Riga, Member of Fintech Association of Hong Kong, Member of Singapore Fintech Association, Member of Non Executive Director Association in London and Member of Alumni Network of Draper University in San Francisco. He loves travelling, he is a cigars lover, an amateur golfer and a dapper man.
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