How does DCA work in practice?
Of course, the success of any DCA strategy is
still subject to what’s happening in the market. To demonstrate, let’s dig into an example
using real-world prices, right as they approached Bitcoin’s biggest downturn to date. If you
invested $100 in bitcoin every week starting on December 18, 2017 (near that year’s price
peak), you would have invested a total of $16,300. But on January 25, 2021, your portfolio
would be worth approximately $65,000 — a return on investment of more than 299%.
In contrast, going “all in” as prices are
peaking is generally considered a bad idea — but how could you know? If you had taken that
same amount of $16,300 and invested it all on December 18, 2017, you would lose nearly
$8,000 throughout the first two years. Although your portfolio would recover, you would
have lost out on the ability to compound your profits in the meantime (and maybe even scared
yourself into selling your bitcoin at a loss).
Now let’s say you waited a year, and invested
$200 in bitcoin every month between December 2018 and December 2020. In this case, your
portfolio would total just over $13,000 in 2020, compared to $23,000 from investing lump-sum.
This “all-in” investment would have earned you a higher profit, but it also would have been
riskier: any significant price movements after your initial investment date would have
affected your whole investment.
Dollar-cost averaging is all about hedging
your bets: it restricts your potential upside in an effort to mitigate possible losses.
Serving as a potentially safer choice for investors, it works to reduce your chances of taking
serious hits to your portfolio caused by short-term price volatility.
To know if DCA is the right strategy for you,
it’s important to think about your unique investment circumstances. It is always best to
consult a financial professional before undertaking a new investment strategy.