What is a DCA and is it any good?
The Dollar-Cost-Average (DCA) is simply the reference term for situations where investors average the initial expenditures. The strategy involves long-term investments wherein investors would gradually collect assets at a reasonable point, continuously, to reduce the absorbance of the market’s fluctuation, while also maintaining disciplined investment.
The DCA technique is performed through the division of capital expenditures for separate and proportionate investment occasions. The frequency of these investments is determined individually, depending on the trader’s preference and disciplined decision-making.
Therefore, most DCA investors do not take the price of an asset into much regard, but rather focus on the overall average pricing of all investments they have made.
An example of DCA
To illustrate, if Bob were to invest in Bitcoin with an annual expenditure of 12,000 THB, his DCA would be averaged on the first day of every month, meaning the accumulated amount would be divided by 12, into 1,000 THB per month.
From this point, Bob would need to spend the mentioned 1,000 THB on Bitcoin on the first of every month, without taking its price into account.
After a year has passed, Bob would have successfully spent his 12,000 THB, yet the amount of BTC he received throughout the year would still depend on the price point at every purchase. If the coins were priced highly, he would have received less than usual and the opposite for the contrasting situation.
The DCA strategy can help reduce market risks when asset prices move in unexpected trends as the initial expenditures have been divided into twelve separate portions, hence mitigating the market volatility. This approach differentiates from investments in Lump-sum techniques wherein a large amount of funds is dumped into one single investment window, heavily increasing risks if investors were to invest at an unfavorable period.
Additionally, DCA investors are inclined to be more disciplined when investing as they are assigned to follow a strict schedule, possibly eliminating a certain level of stress.
Though DCA is considered a less risky investment technique, if continuously found to be non-profitable or investments in certain assets were at a non-favorable point in time, traders can plausibly lose large sums of their capital.
Furthermore, the method focuses on consistency, meaning investors must not change investment techniques along the way, as they would lose their sense of discipline and possibly miss out on certain profitable opportunities where others would be enjoying instead.