In the world of investing, the quest for the perfect strategy often leads to countless sleepless nights and endless research. However, one strategy that has stood the test of time and consistently delivered solid results is Dollar Cost Averaging (DCA). This method offers a straightforward approach to investing that can help both beginners and seasoned investors build wealth over time, all while reducing the stress associated with market volatility.

Understanding Dollar Cost Averaging

Dollar Cost Averaging is a long-term investment strategy that involves regularly investing a fixed amount of money at regular intervals, regardless of market conditions. This means that you continue to invest the same euro amount every month, regardless of the price of the stock market.

Imagine you have €1000 to invest every month. Regardless of the price of the stock market, you will buy €1000 worth of stocks every month. Consider that in January, your stock market ETF of choice is priced at €200. You invest €1000 at a price of €200, buying 5 shares. In February, your ETF of choice is priced at €50. You invest €1000 at a price of €50, buying 20 shares.

Simplifying investing

One of the key benefits of Dollar Cost Averaging is that it greatly simplifies your investing process. You don’t have to spend hours to analyze the market developments, pouring over the financial news cycle, assessing long term and short-term expectations. You just log in, click buy, and close your laptop. Given time is your most valuable commodity, this benefit cannot be underestimated.

Additionally, takes the pressure off investors to time the market perfectly. Attempting to buy low and sell high consistently is a daunting task, even for the most seasoned professionals. With DCA, you avoid the stress of trying to predict market movements, given you are investing consistently over time.

Timing the market without trying

Every investor knows that you should aim to buy low and sell high. In trying to do so, most investors actually end up doing the opposite. The power of DCA is that by refusing to time the market, you are actually timing the market, without trying! How is this possible?

In the example above, you will notice that you bought more shares in February, when the share price is low, than in January, when the share price is high. As a result, your average purchase price is much lower than the average stock market price. Across this period of two months, the average share price of your ETF of choice was €125. However, the average purchase price of your shares is just €80! This is the power of Dollar Cost Averaging.

Consistency and low volatility

Dollar Cost Averaging enforces consistency, which is an essential investing habit. By investing consistently over time, you are positioning yourself to benefit from the power of compounding returns, dubbed the eighth world wonder by Albert Einstein. DCA enforces a disciplined, long-term investing approach, instead of going for short-term speculative ‘opportunities’. You are forced to see the big picture while ignoring common investment pitfalls, such as trying to time the market.

Investing a consistent amount each month also reduces the volatility of your investment results. Given you buy in every month of the year (and the year thereafter), the specific price level at which you enter the market does not determine your investment results. A highly volatile year will not necessarily lead to a highly volatile year for your portfolio, given you buy more shares when prices are low and less when prices are high.

Conclusion

Dollar Cost Averaging is a time-tested investment tool which helps you optimize the return vs. risk for any given investment class. By using a disciplined, almost robotic approach, you can navigate market volatility with confidence. By refusing to time the market, you actually end up timing the market – how cool is that? Using DCA, you can achieve a lower average purchase price than the average stock market price in a given period. Additionally, the simplified approach of DCA saves you plenty of time, our most valuable resource.