Dollar-cost averaging: passive investment strategy

Want to know how to maximise your investment income, without spending any of your time? You got in the right place. Whether it is about Bitcoin, stocks, funds or commodities dollar-cost averaging proves to be one of the best investment strategies to adopt.

This technique is very well explained by Warren Buffett’s mentor, Benjamin Graham, a real value-investing genius. He determined dollar-cost averaging to be the best for passive investors. If you want to find out more, read The Intelligent Investor (link here).

What does dollar-cost averaging mean?

The main idea is that one is setting a target to invest x dollars monthly in an asset. Depending on the market fluctuations, it can result in a smaller or bigger quantity of asset units. One thing is certain: buying with the same money over a period of time has 3 benefits:

1. A cash flow is generally less affected by smaller, more regular payments than one big payment
2. Accumulation over longer periods of time might show impressive results
3. This is the most important: being exposed to the market fluctuations by the regular investments, the price of your investment will be situated at an average of all your purchases – meaning that at most times you will be positive

Let’s take an example to understand number 3. Let’s say we take 3 months, over which an asset’s price is $250, $200 and $125 and you invest $2000 a month in it. At the end, you will certainly have 8 + 10 + 16 = 34 units at a grand total of $6000. This makes the average price of 1 unit of the ones you bought around $180. If you would have bought $6000 of the asset in the first month, you would have had only 24 units now.

Why is dollar-cost averaging so useful?

Dollar-cost averaging is very useful because you don’t need to look out for market fluctuations. Since you are buying at both high and low levels, the price will even up and you will be buying at average. Since the trend, on a long enough timespan, is positive – you cannot lose money. You can actually win some nice money with this technique.

Neutralising short-term volatility in value investing is one of the biggest powers one can have. Of course, with great power comes great responsibility. You have to be able to pick assets with huge and certain upside potential. For example, the S&P 500, in the stock market, has proven to be very good as a long-term investment.

Imagine dollar-cost averaging with Bitcoin

Since this method is so effective in the stock market, where volatility is moderate, imagine how it might help you using it in the cryptocurrency market. Dollar-cost averaging on Bitcoin could remove much of the risk associated with an investment here. If more people knew how to use it and realised how much risk goes away, there would be many more crypto investors.

Conclusions

In conclusion, using dollar-cost averaging is helpful in any market. It makes even more sense to use it in a higher volatility medium. Anyhow, if you want to add something, feel free to leave a comment below. If you want to get in touch with me personally, use this link.