Dollar-cost averaging, also known as incremental trading or unit cost averaging, is an investment strategy that involves using a fixed dollar amount to buy into a market at regular intervals over a long period.
The investor is first required to calculate how much exactly he wants to invest with. On completion of this, rather than putting in the entire sum and buying the asset at a particular price at once (lump-sum investing), the investor makes another choice to divide the capital into parts.
Thus, after passaging every period, a part of the investment is used to buy in that asset at that price. For instance, A has $2000 to invest in Bitcoin. Instead of buying $2000 worth of Bitcoin at $35000 per Bitcoin, he splits it into 10 $200-parts. He then puts a part of the investment in the Bitcoin market every two weeks, regardless of the movement of the price Bitcoin.
The basic idea behind this strategy is that it ensures you buy more units of the asset when the price is low, and lesser units when the price is high. That way, it protected your investment from the heavy losses you may incur if you buy into a market right before it slumps. Over time, the average cost of the asset is relatively low and stable, protecting you from market volatility. With the peculiarity of this trading strategy, dollar cost averaging is especially useful for very volatile markets and markets undergoing a temporary dip.
However, because dollar-cost averaging is known to substantially minimize risk, its major downside is it tends to reduce potential profits; as do most risk management techniques. After all, the greater the risk, the greater the reward.
DCA is usually a long-term investing plan and can be quite rewarding as well. However, it requires a substantial level of discipline and consistency to follow through with the investment plan.
To know more about dollar-cost averaging, I’ve done a comprehensive video on YouTube that’ll show you why, when and how to use this investment strategy.
You can access the video via this link.
