Dollar Cost Averaging 101
Many of the brightest minds in the investing world share one common trait: they recommend dollar cost averaging as an investment strategy.
But what is dollar cost averaging and how does it work?
Here's Dollar Cost Averaging 101!
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1/ Dollar cost averaging, or "DCA" for short, is a simple investment strategy in which an investor splits the total amount to be invested in a given asset across regular periodic purchases.
The regular purchases occur regardless of price, volatility, or economic conditions.
2/ The goal is to remove the complexities of market timing from the process, allowing an investor to build their desired position without concern for external factors.
Its simplicity removes behavioral and psychological biases from the equation.
Let's look at an example.
3/ Imagine you want to build a $10,000 position in bitcoin. You have done your research and believe in the long-term story.
You aren't sure if it will go up or down in the near-term, so you decide to dollar-cost average.
Great decision! How will you do it?
4/ You split the $10,000 up into 20 pieces ($500 each). You could have done any number of pieces, but 20 felt right.
You decide on a weekly DCA, so every Monday, you buy $500 of $BTC, regardless of price. After 20 weeks, you have built your desired $10,000 cost basis position.
