The Pros And Cons Of Dollar Cost Averaging

The Pros And Cons Of Dollar Cost Averaging
The Pros And Cons Of Dollar Cost Averaging

You might be thinking this is “another of those dollar cost averaging article”. I assure you that this is not. It is always during a Bear Market Survival that the topic of dollar cost averaging surfaces. Rarely, this topic is popular during a upward trending market.

Once a for all, I will discuss on the value of dollar cost averaging and what it can do in your portfolio. If you have been investing in China over the last year, you might think that dollar cost averaging is not working on China’s stocks? Read on and consider the pros and cons.

What is Dollar Cost Averaging (DCA)?

Dollar Cost Averaging is a popular investment method of investing equal amounts of money over a period of time. The opposite of this would be to invest a lump sum of money at once. I will leave you to read up about summary of DCA in this photo below.

Dollar Cost Averaging
Dollar Cost Averaging

Financial advisors are one group of people that preach about this because of the simplicity of the method. It is however, easier said than done as emotions might get better of us in the market.

One question you can ask yourself today ( 1st June 2022), are you still averaging down?

The Pros

  • Simple and systematic (if you set rules that continuously invest during ups and down): You don’t really “think” when you employ a DCA strategy. You simply trust the system and invest through the ups and downs. It will work BEST if it is via auto-transfer rather than manually transferring.
  • Downside protection: In a downward market, you will see a “bigger lost” if you do a lump sum strategy. For example, if the market corrected 20% in a month, your initial investment of $100,000 will be left with $80,000 (lost of $20,000). Now, if you do a DCA investing $10K per month, your initial investment will be left with $8,000 (lost of $2,000). You also have capital to continue investing at the “down” on the second month. For those that is retiring soon, this have great psychological benefits. I believe there is nobody that wants to lose 20% of their nest egg 6 months prior to retirement.

The Cons

  • FOMO (Fear of missing out): If this is an upward market, you risk missing out on the extra capital gains and compounding benefits. Using the same scenario as above, someone who invested $100,000 with a 20% run-up would make $20,000, while the investor DCA their first  $10k would’ve only made $2k.
  • Being too passive: DCA works best if the asset have a long term upward tread in nature. If the underlying investments are downward/sideways moving (take a look at the Japan market), DCA will not be the best strategy.

Final Thoughts

A big shout out to one of the most loyal reader of Wealthdojo Mr Sinkie. He sums up my thoughts on DCA in a single sentence. “DCA works best for assets that are volatile but have very long history of uptrend”. Thank you for being so patient and contributing to the blog. For those that are interested in his elaboration (I think you should), go over to Bear Market Survival Tips.

Looking forward to more people commenting on the blog.

If you guys need help, please reach out. I will be more than happy to have a conversation with you.

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

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The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

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