Dollar-Cost Averaging Strategy

Dollar-cost averaging (DCA) involves investing fixed amounts at regular intervals regardless of price. It's simple, effective, and removes the stress of market timing. [DEFINITION] Dollar-Cost Averaging: An investment strategy where you invest a fixed dollar amount at regular intervals (weekly, monthly) regardless of market conditions. ### How DCA Works **The math:** When you invest a fixed amount: - High prices = fewer shares bought - Low prices = more shares bought - Average cost per share ends up below the average price [EXAMPLE] $500 monthly investment in a stock: | Month | Price | Shares Bought | |-------|-------|---------------| | Jan | $50 | 10 | | Feb | $40 | 12.5 | | Mar | $45 | 11.1 | | Apr | $55 | 9.1 | Average price: $47.50 Your average cost: $46.51 (better than average price!) ### Benefits of DCA [KEY] DCA removes the biggest enemy of investors—themselves. It eliminates emotional decision-making and timing stress. **Psychological benefits:** - No stress about "right time to buy" - Automatic habit building - Removes market timing temptation - Easier to stick with long-term **Financial benefits:** - Lower average cost than random lump sum - Captures dollar-cost averaging discount - Consistent investing builds wealth ### DCA vs. Lump Sum **Lump sum:** Invest all money at once **DCA:** Spread investment over time **Research shows:** - Lump sum wins ~65% of the time (markets trend up) - DCA provides psychological comfort - DCA better if market drops soon after investment [TIP] If you can't stomach investing a lump sum, DCA is better than not investing at all. Done is better than perfect. ### Implementing DCA **Practical steps:** 1. Set up automatic transfers from bank 2. Choose investment frequency (weekly or monthly) 3. Select your target investments (index funds ideal) 4. Don't look at portfolio daily 5. Rebalance annually **Best investments for DCA:** - S&P 500 index funds (VOO, SPY) - Total market funds (VTI) - Target-date retirement funds [WARNING] DCA doesn't protect against prolonged bear markets or poor investment choices. It reduces timing risk, not investment risk. ### Value Averaging (Advanced DCA) [DEFINITION] Value Averaging: Adjusting investment amounts to keep portfolio growth on target—invest more when prices fall, less when prices rise. **Value averaging example:** Target: Portfolio grows $500/month - Month ends below target: Invest more - Month ends above target: Invest less (or nothing) More aggressive than DCA but requires more monitoring. ### When to Stop DCA **Keep going when:** - You have regular income to invest - You're building toward long-term goals - You're not yet retired **Consider stopping when:** - Approaching retirement (shift to preservation) - Major life changes requiring cash - Investment thesis changes [EXERCISE] You have $12,000 to invest. Option A: Invest all now. Option B: Invest $1,000/month for 12 months. If you expect the market to rise 10% this year, which is mathematically better? What if you're nervous about investing? |ANSWER| Mathematically, Option A—money in the market longer captures more of the expected 10% gain. But if you're nervous, Option B reduces regret risk and psychological pain if the market drops early. Either beats not investing. [SCENARIO] You've been DCA-ing into the S&P 500 monthly. The market drops 30% in a crash. Your portfolio is down significantly. Some people stop investing or sell. What should you do? Keep investing! This is exactly when DCA shines. Your fixed $500/month now buys 43% more shares than before the crash. Those shares bought at low prices will compound for decades. Stopping or selling during crashes is the #1 wealth destroyer for individual investors. DCA removes the temptation to make this mistake.