Objective | To learn how to use Dollar-Cost Averaging to make money.
In our previous post, we highlighted the 3 essential ETFs for your investment portfolio.
In this post, we will explain the best buying strategy for such a long term fund.
Given the current market condition, the billion-dollar question is, when is the exact timing to enter the market or should you wait？
What if I tell you that you don't need to know when to buy
That's right, forget about market timing.
Most professional fund manager /trader /analyst etc who tried, got it wrong most of the time.
So, what's the alternative?
The answer is Dollar-Cost Averaging.
What is Dollar-Cost Averaging?
Dollar-Cost Averaging is an investment strategy in which an investor purchases a certain fixed dollar value of ETFs /stocks regularly (eg monthly, quarterly, or yearly, etc) across a fixed period.
The purchases must occur regardless of the ETFs /stocks prices or market conditions and at regular intervals.
This strategy removes the uncertainty of attempting to always hit the right price at the right time.
How It Works?
Below is a simplified explanation of its working.
Assuming Investor A invested $100 per month for 12 months.
During this period, ETF X price moved from $1 to $0.80 to $0.50 and back again.
In Jan, A brought 100 shares of ETF X @ $1 each, worth $100.
From Feb to Apr, ETF X dropped to $0.80 and A brought 125 shares with the same $100 each month.
From May to Aug, ETF X dropped to $0.50 and A brought 200 shares with the same $100 each month.
And so on for the rest of the year.
In Dec, ETF X moved back to $1. A invested total $1,200 and brought 1,750 shares worth $1,750.
Usefulness
Dollar-Cost Averaging is useful for
Most importantly, good quality broad based index ETFs and blue-chip stocks. Because such ETFs /stocks will continue to exist over the long term.
Instilling regular saving discipline.
Investors without a large initial capital to accumulate wealth via multiple affordable amount.
Not missing out on market recovery.
Investor without the investment analysis skill to invest.
Long term buy & hold investment style.
Limitations
Dollar-Cost Averaging is unsuitable for
All other non-blue chips stocks.
Short term trading.
Use as average down strategy.
Differences between Dollar Cost Averaging & Average Down Strategy
Dollar-Cost Averaging
A systematic approach to buy a good quality ETF with affordable installment on a fixed regular basis (eg monthly purchase).
The objective is to build a sizable financial asset with regular purchases over the long term.
Average Down
Ad hoc buying of more quantity of the same stock simply because its price has dropped from the previous purchase price.
It is done to lower the average purchase price hoping that the stock price will recover so that the investor can break even or make a small profit.
There is no consideration of company /stock fundamental strength, price trend turning point, or trading strategy.
Warning
Never ever use averaging down strategy to hang on to a losing stock. Learn to cut loss instead and move on to a better stock.
You will NOT make any money by merely reading this post. You need to take action.
Assignment
Question | What is your Dollar Cost Averaging strategy?
If you do not have a satisfactory answer to the above question, please feel free to contact me at ewppleblog@outlook.com.
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