I will be writing some posts to try to educate my kids. I know they are still very young (4 and 7) but it is never too early to start. And they can read these blog posts later on in life 😉 (This is probably the case, because they don’t speak or read English very well at this moment – You got to love an understatement!).
This blog post is a post for my kids when they are a little bit older. I did not talk to my kids about this subject (yet).
When you have saved a bit of money and you are ready to start investing, it is sometimes hard to make the first move. You might be scared of investing everything at once. What if your shares plummet the next day, or at the end of this month? All kind of emotions will go through your mind. This makes it even harder to invest.
Emotions and investing are not a good combination. A lot of books have been written on this subject. So you have to find a way to exclude your emotions from your decision-making. One-way to do this is by using the investment strategy called: Dollar Cost Averaging (DCA).
DCA is an investment strategy for reducing the risk (think of Mr. Market’s mood swings) by systematically buying stocks at regular intervals during a long period. DCA reduces the risk of incurring a substantial loss resulting from investing the entire “lump sum” just before a fall in the market.
With DCA more shares are purchased when prices are low, and fewer shares are bought when prices are high.
Dollar Cost Averaging Example
Let’s take a look at using DCA for a total investment amount of € 6,000.
If you did some “lump sum” investing in January you got 455,93 shares. This is a nice pile of stocks. But what will happen if we use the same amount, with the DCA strategy?
|Investment date||Amount invested||Price per share||# Shares purchased|
In this example, you can see that as the price per share goes up you can buy fewer shares, and as the price per share goes down you buy more shares. Note that the average share price is $9.64, which is less than the share price during January. In this example, dollar cost averaging comes out ahead of investing in a lump sum, but it could very well come out with the opposite result. To reduce this risk, you have to use the DCA strategy for a long period of time (several market swings).
In comparison with lump sum investing, with DCA you got almost 37% more stocks (622,36)! Wow this is really a lot more. And now think what amount of dividend you receive more every month/quarter using DCA.
Pros of Dollar Cost Averaging
- You do no need a large sum of money, you invest small sums every time
- No stress over volatility, so a good night sleep
- Limiting your risk – no big losses because you never buy at the top
- Easy to be automated.
Cons of Dollar Cost Averaging
- Never optimum results
- More fees
- It takes a longer time. You will not be rich with one trade.
- It is risky to use on one individual stock (what if you pick a loser)
Dollar cost averaging is not a strategy where you have to try to time the market. It is a strategy you can use to lower the risk. And also a strategy to exclude your emotions from your investment decisions.
You do not need a big sum of money to start using DCA. So it is a strategy to invest with amounts of money you can afford. The amount you can invest could be as low as €25. It is a great way of creating the habit of investing. And on top of that it can be automated. So you do not need to think about every time.
This is my sixth blog post about teaching my kids. I hope my kids at the age of say 18, have all the financial knowledge I’m having right now. This would be a huge advantage for them! And that’s why I started these blog post series.
Another blog post to keep the “snowball of knowledge” rolling.
Did or do you teach your kids about Dollar Cost Averaging? How did you do it?
And will you help me to get the “snowball of knowledge” rolling?