DOLLAR-COST AVERAGING INVESTMENT STRATEGY
The following is my outline of Dollar-Cost Averaging, my experiences with it, and how it can be used to help people achieve their financial goals.
The Dollar-Cost Averaging Strategy is an investment portfolio management technique introduced to the general public when mutual funds were first created. It was meant to introduce and attract new investors to stock and bond markets while making it easier for small and medium-sized investors to participate in a new money-making opportunity.
However, I have a different take on the DCA strategy.
Before diving into my experiences, let’s define some terms.
According to Investopedia, Dollar-Cost Averaging is a simple technique that entails investing a fixed amount of money in the same fund or stock at regular intervals over a long period.
You already use this strategy if you have a 401(k) retirement plan.
Dollar-cost averaging is a strategy that almost certainly may get results that are as good or better than aiming to buy low and sell high. DCA can produce better results because no one can accurately time the market.
This definition gives you only half the story, which may or may not work for you, depending on your circumstances. This definition also excludes the potential problems that will almost certainly influence how much money you will save, earn, or lose on your investment. Further, it omits the fact that markets must have near-perfect conditions to produce any significant results from this method.
Below I will attempt to describe the omissions, problems, and circumstances that may affect your results.
PROBLEMS and OMISSIONS in DESCRIBING DCA STRATEGY, and SOLUTIONS to be IMPLEMENTED for DCA STRATEGY to PRODUCE MEANINGFUL RESULTS:
1. CONTRACT TO LIVE FOREVER.
Because DCA strategy needs a long time to produce meaningful results, a “contract to live forever” or at least to leave for a reasonably extended period is required. If you die while implementing the DCA strategy, the strategy will pass on with you. One case is if you live by yourself and do not care what happens when you pass. But, it is a different story if you have a family and would like to take care of them when you are gone, especially if you have small children.
You can implement several solutions to ensure your family and loved ones are taken care of.
1.1. Purchase Life Insurance and enough of it. Approach life insurance only as it’s meant to be used and never as an investment. Remember that if unexpected death comes knocking, life insurance policies MUST PAY for funeral expenses and pay off your vehicles, house mortgage, and other loans that may impact the financial well-being of your family.
1.2. Because of the risk, life insurance can be misspent and lost. Create a Trust Account with a reputable financial institution to prevent misappropriation of funds. Trust Accounts are not only for the wealthy. Trusts are meant to establish rules on how the money will be invested and spent and can be used to make sure finances continue to grow in our absence and provide support for our families. Trust is a great way to protect money from unwanted hands and unneeded manipulations.
2. INABILITY TO PRODUCE INCOME WHILE WORKING ON YOUR DCA STRATEGY.
One of the biggest dangers to the Dollar-Cost Average Strategy is your ability, or the inability to generate income and invest in DCA regularly. Suppose you lose your income while investing in DCA and cannot continue to invest. In that case, it can be devastating to your investments. Depending on how long it lasts, it can be a complete disaster—decimating your financial and potentially physical, psychological, and emotional well-being.
If you lose your income and stop contributing to your DCA Strategy, the time you do not contribute could be the best time to invest, and because of that, you may miss the most significant opportunity you may have. Based on the statistics, you may get the best chance to invest only about six times during your lifetime. Continuous investment is crucial while implementing the DCA because those six investments will produce 80% – 90% of your returns.
2.1. To counteract the inability to produce an income problem, you shall create a Cash Savings Account. You can put this cash into a Trust Fund so that no one can touch it, including the government. No bonds, no stocks, no mutual funds because those fluctuate with the market, and if you need funds when you’re at a loss, you will lose even more money when you are most vulnerable.
2.3. Your goal should be to have enough cash to cover at least two to three years of living expenses in your current lifestyle. When your lifestyle expands, your cash savings must grow as well. Never decrease your protection, only use them when it is a must.
3. SEVERE ILLNESS OR INJURY THAT MAY AFFECT YOUR EMPLOYMENT OF BUSINESS.
Life happens unpredictably. Sometimes people get seriously ill or disabled. Disability or illness can put an end to many plans as well as investments. There is not much to be done about this. But we can put mechanisms that will help keep our assets working, so we do not have to suffer financially.
3.1. Life Insurance companies offer a wide variety of Long-Term Care and Disability insurance products. These products can be purchased through your employer or individually. Purchase as much insurance as you need to cover your and your family’s expenses.
3.2. Remember to beware of insurance companies trying to sell you what you don’t need and will never use. Purchase insurance products only, no annuities or anything like that.
ONLY WHEN THE FIRST THREE CONDITIONS ARE SATISFIED CAN ANY INVESTMENT BE CONSIDERED VIABLE AND PRODUCTIVE.
4. RISK OF CORRUPT OR FAILING FINANCIAL INSTITUTIONS.
When investing, there is always a possibility of running into a Dishonest or Failing financial institution. All I will say here is to remember Bernie Madoff and Lehman Brothers scandals and billions of investor funds disappearing.
4.1. To mitigate the risk of corrupt or failing financial institutions, work only with large and reputable institutions with proven track records and those that are big enough to be bailed out by the government in case of another financial crisis like the one in 2008.
NOW WE GET TO INVEST AND MAKE OUR DREAMS COME TRUE.
5. LIKELIHOOD OF IMPROPER USE OF DOLLAR-COST AVERAGING.
Best practice to implement the Dollar-Cost Averaging.
5.1. DCA strategy can only be used as a long-term strategy. If you need the money for anything else, do not invest in DCA.
5.2. Investment in DCA strategy shall stop as soon as the allocated investment amount is reached. Or it shall stop when an economic recovery is well on its way, and the market reaches a state of exhilaration and euphoria (check the chart above). At this time, you should prepare to exit the market and enter cash and cash equivalent positions (not the bonds; most people do not know how to use them and lose money). Cash will allow us to enter a low market at the lowest prices. Remember, hard times are coming, and Cash is the King.
5.3. DCA can NEVER be applied to individual company stock. When applied to a particular stock, it’s more speculation than investment. For example, if you DCA into a GE stock in the last 30 years, you would have lost 90% of your investment. Invest in broader market index funds such as SPX (S&P 500) to apply the DCA strategy successfully. These funds invest in hundreds of companies and have better chances of succeeding.
5.4. Investment into a DCA strategy is better applied in a deeply depressed market and should be timed to coincide with upside signals in reversal indicators. You can refer to the chart above to figure out when to invest and when to go to cash.
5.5. The total investment amount should be divided into several portions to be invested at different times. I divide my cash into ten (10) equal parts, one or two of which are usually kept in reserve. So, 10% of the total investment amount will be invested every time I get an upside reversal signal. This signal shall come after a severe economic downturn, and 80% will be invested if an apparent economic recovery is on the way. This strategy must be supported by positive economic news.
5.6. If a large sum of capital is not available, a regular periodic investment into a CASH or MONEY MARKET FUND can help accumulate enough funds for investment at proper times.
5.7. Once an economic recovery is on its way and we are well into money, we have to look for another significant downturn to liquidate our positions and go all cash until we can reinvest. This procedure must be supported by negative economic news. Please refer to the chart above for the appropriate times.
6. DOLLAR-COST AVERAGING REQUIRES FAVORABLE MARKET CONDITIONS.
Dollar-Cost Averaging strategy requires favorable market conditions to deliver substantial results. It is during a significant economic downturn when we have the opportunity to purchase high-value assets at a deep discount.
6.1. My use of the DCA strategy is to accumulate as much cash as possible during good times, which usually comes from my regular income. And invest it into my favorite instruments during the market turmoil, panic, and capitulation. When no one wants to buy anything is the best time to invest because this is the time when you get the most value for your money.
6.2. Do not try to predict the market. Instead, try to listen to it because it always tells us what the next move will be. All we need to do is go with the flow and ignore the noise created by special interests. Most importantly, do not try to time the lowest or the highest point – you will never be able to do that.
6.3. Usually, we can accurately predict when economic sentiment changes from positive to negative and negative to positive. Because significant news reporting agencies typically support these turns, it is hard to miss. The news that problems are coming will be everywhere, and euphoria will also be everywhere. You have to listen.
7. FINAL WORDS
if I’ve learned anything from my 30-year career, not to become a victim of someone else’s agenda. Do your research and do not believe a word of what stockbrokers and various financial advisers tell you. Do what they do and not what they ask you to do. Most of them either push their own or someone else’s agenda and act as agents that facilitate the transfer of wealth from you to the banks and super-wealthy.
If you find a good financial adviser who cares and knows what he is doing, consider yourself to be lucky. As a rule of thumb, a financial adviser takes about 10-12 years of experience to become proficient in this work. So pay attention to that as well.
Have any questions about markets, investment, or financial health? Ask away, and I’ll answer in the comments or in another article!