Polliesdividend

Teaching my kids – Part 6: Dollar Cost Average?

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
January 500 13,16 37,99
February 500 15,65 31,95
March 500 14,78 33,83
April 500 12,05 41,49
May 500 13,66 36,60
June 500 15,03 33,27
July 500 8,99 55,62
August 500 8,12 61,58
September 500 7,87 63,53
October 500 5,78 86,51
November 500 6,37 78,49
December 500 8,13 61,50
Total 6.000 622,36

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)

Conclusion
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?

Cheers,

Pollie

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9 thoughts on “Teaching my kids – Part 6: Dollar Cost Average?

  1. Mr. CF

    Hey Pollie,
    well put! We actually do a combination of DCA and using limits to purchase shares. We are kind of trying to optimize the DCA, if you will. So we don’t invest on a regular basis, but purchases are triggered when certain dividend paying shares hit certain levels. We have a reasonable cash pile (still), so this strategy still works great now that the market is tanking (we nicely are averaging down at the moment). For our index funds we actually do straight forward DCA as we invest in those on a monthly basis.

    Keep these articles coming, they are a great read and will also help your kids, Miss CF and many other kids in the future!
    Thanks.

  2. Dividend for Starters

    Hey Pollie,

    Great post again!
    I have to DCA, because I do not have the ‘large sum’ you are talking about..

    That’s no bad thing though, because of the benefits you’ve just explained.

    Wish you the best.
    DfS

  3. ambertreeleaves

    The way we DCA is investing each month the cash we do not spend. We do this almost on full automatic. It maks me feel better to do so, as otherwise, each month there would be the question: when to buy, do I wait another do,….

    Since June, I try to optimise by holding back some cash from our monthly investment. I save up this cash to buy in the dips. I use limit orders for this. This is partially trying to time the market, I know, but I only do this if I can not buy below my average cost price.

    1. Polliesdividend Post author

      Hello Amber,

      An automated DCA system is really great!
      Take away the emotions.
      And your idea of leaving some money behind and then buying at the dips., i like. Does it work?

      Cheers,

      Pollie

      1. ambertreeleaves

        buying the dips is work in progress. I have set a limit order but it was missed buy a few cents… It is now a matter to keep my hands off that money and leave it for the limit order rather than throw it in now…

  4. Special Agent Dividend

    I’m a firm believer in DCA, especially for a novice like me. I have quite a few of my investments on a monthly purchase plan and routinely buy small amounts to leverage my DCA in a position. While I still save for limit orders on larger amounts, I’ll maintain my small interval buys to take advantage of the up and down ride in the market.

    1. Polliesdividend Post author

      Hello Agent Dividend,

      Thanks for stopping by, and taking the time to write a comment.
      DCA is a really great method for new DGI’s or/and when you buy stocks with small amounts of money. If you automate it, it takes out the emotions. That is even better!
      Keep up the good work!

      Cheers,

      Pollie

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