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What is Dollar-Cost Averaging? You might’ve heard this investing term before called DCA.
The strategy really is built around these two principles:
Long-term time-horizon with belief the price will be higher in the future.
Time spent in the market is more important than timing the market. (It’s impossible to time the market)
So let’s say you have $300 to invest in a stock priced at $10. You spend all $300 at once and buy 30 shares.
A month later, the stock drops to $6 per share, so now your $300 has become $180. You’re bummed your investment is down, and you don’t want to invest more money outside of the $300 you allocated.
With DCA you invest in increments over a period of time knowing that your cost will average out.
So $100 at the start when price is at $10, a month later the price is $6 you buy another $100. In another month with the price at $9 you buy $100.
For the first example, you spent $300 for 30 shares that are now worth $270 total. (30 shares at a current price of $9 per share = $270 worth of stock).
With the DCA example you still spent $300, but it averages out to 37.8 shares worth $340 total.
How do we get that? Well $100 at $10/share got you 10 shares. Then a month later was $100 bought at $6/share, for 16.67 shares total. The last $100 was spent when the share price was $9 per share. That got you 11.11 shares of stock. Add them all up and it comes out to 37.8 shares, with the current stock price at $9 per share, you have $340.
That's $70 more dollars, or about 26% more stock than if you didn't use Dollar-Cost Averaging.
You can see why DCA helps protect against timing the market! Follow for more plain easy analysis.
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