Investing in the stock market can be intimidating for beginners.
There are thousands of companies in the stock market to choose from and how do you know which one is the best?
Another problem associated with beginning investor is to find out which brokerage to choose from or should he / she just invest through a financial adviser. In the end, they end up taking no action to achieve their financial goals.
In this article, I am going to share one simple method to invest in the stock market. Now, all information shared here is for education purposes only and should not be taken as investment advice. You can implement this at your own risk and after consulting your financial adviser.
Before I go on to share the method, I have one question for you. What is stopping from investing in the stock market?
Is it :
a) I think investing in the stock market is too risky
b) I don’t know how to do it
c) I don’t have the money to invest now
d) Other reasons.
Let me know your answer in the comment section below.
So the method that I want to share is called dollar-cost averaging.
This method is a great way to start investing and grow your wealth over time. It's also a good strategy for those who don't have enough money to invest all at once or want to avoid making emotional decisions about when to buy or sell stocks.
So how does it work?
This investment technique involves buying equal dollar amounts of a particular asset on a regular schedule, regardless of price fluctuations between purchases. This allows you to take advantage of dips in the market without having too much invested at any one time and helps you build up your portfolio slowly but surely over time.
Let me give you an illustration.
Let say you set aside $200 to invest every month and you decided on this particular stock or fund or ETF.
If the asset cost $4 in Jan, you can buy 50 units for $200.
If it rise up to $5 in Feb, the $200 will buy you 40 units.
In March, if the asset drops to $3.50, you will buy about 57 units
This goes on and on. If the price of the asset goes up, you buy lesser units with the $200. If the price goes down, you will buy more units.
Over time, you will accumulate more and more units of the asset and the cost of buying the asset is averaged out. In the long run, when the asset appreciates in value, you will make money.
So far so good?
Let’s talk about the benefits of DCA
Benefits of dollar cost averaging
Avoid market timing
The first benefit is that this strategy is used to avoid market timing, which can be difficult and risky.
There is a saying that goes like this “Time in the market is more important than timing the market.“ Market timing is not a pure science that many investors, even professional ones, can master.
Investing a lump sum at the wrong time can be risky, which can adversely affect a portfolio’s value significantly. It is difficult to predict market swings; hence, the dollar-cost averaging strategy will provide a smoothening of the cost of purchase, which can benefit you, the investor.
Avoid putting all the eggs in one basket
The second benefit is that you avoid putting all the eggs in one basket. You mitigate volatility and risk.
Dollar-cost averaging reduces investment risk, and capital is preserved to avoid a market crash. It preserves money, which provides liquidity and flexibility in managing an investment portfolio.
DCA avoids the disadvantage of lump-sum investing through the purchase of a security when its price is artificially inflated due to market sentiment, which results in the purchase of a lower than required quantity of a security.
When the security price discovers its intrinsic price through a market correction or the bubble bursts, an investor’s portfolio will decline. Some downturns are prolonged, further diminishing portfolio net worth.
Using DCA ensures minimum loss and possibly high returns. DCA can reduce regret feelings through its provision of short-term, downside protection against a swift deterioration in a security price.
A declining market is often viewed as a buying opportunity; hence, DCA can significantly boost long-term portfolio return potential when the market starts to rise.
DCA takes the emotion out of the picture
The use of DCA eliminates or reduces emotional investing.
Let me explain...
A disciplined buying strategy through DCA makes the investor focus their energy on the task at hand and eliminates news and information hype from various media about the stock market’s short-term performance and direction.
You can start investing sooner with little money
$100 is enough to start. Nowadays there are more and more institutions allowing investors to start their investment journey from as low as $100. You might be focusing on repaying your debt so you don’t have a lot of spare cash every month. By allocating a small sum to invest, you don’t miss out the returns in the long run.
DCA instill discipline
Building up from the previous point, DCA Instill discipline. It ensures that you regularly set aside money to invest.
The strategy of adding money regularly to an investment account allows disciplined saving, as the portfolio balance increases even when its present assets are depreciating.
Hands off approach to investing
Lastly, I love the hands-off approach. You can set it and forget it. There is no need to constantly monitor the portfolio. It is also good for an investor who does not like to do research on individual companies and read all the financial statements etc.
Of course, there is no perfect solution in investing. Let’s talk about some potential drawbacks of Dollar Cost Averaging.
Drawbacks of Dollar Cost Averaging
Higher transaction costs
Firstly, Higher transaction costs: Each monthly investment accumulates transaction fees that could stack up
By systematically purchasing securities in small amounts over a certain period, investors run the risk of incurring high transaction costs, which can have the potential to offset the gains accrued by the current assets in the portfolio.
Therefore it is important to check the fees charged by the institution before you start to invest with them.
Returns are lower than lump sum investing
Secondly, the returns are lower than lump sum investing: Lump sum investing has shown to outperform DCA in the long run.
When we use DCA strategy to reduce risk, it will inevitably lead to lower returns. The market typically experiences longer sustained bull markets of rising prices than the opposite. Thus, a DCA investor is more likely to lose out on asset appreciation and greater gains than one that invests a lump sum.
A study by U.S.-based investment advisor Vanguard in 2012 revealed that historically 66% of the time, a lump-sum investment would’ve produced much higher returns than DCA.
Therefore, in my opinion, DCA is good when you don’t have a lump sum of money to invest. If you happen to have a sum of money e.g $10000 due to getting your bonuses, inheritance, or selling something, don’t do DCA of $100 per month, It will take 8 years to complete. You will lose all the potential gains.
When you have a lump sum of money to invest, you may want to divide into 3 tranches to invest instead.
If you happen to have a sum of money e.g $10000 due to getting your bonuses, inheritance, or selling something, don’t do DCA of $100 per month, It will take 8 years to complete. You will lose all the potential gains.
How To Start Dollar Cost Averaging And What To Invest
If you are convinced of the DCA method, I am sure your next two questions will be how to start DCA and what to invest in?
Research which institutions allow regular investment schemes
First, you need to research which institution in your country allows you to do regular weekly or monthly investments. They could be the banks or brokerages like Fidelity or TD Ameritrade. You can contribute an amount that you are comfortable with, say $100 and invest in an ETF like Vanguard total stock market index fund or S&P 500 index fund.
I live in Singapore and there are many institutions that offer their platforms to do regular investment. For example, OCBC offers blue-chip investment program, POEMS from Philip Securities also offer regular investment plan.
There are also Robo adviser companies like Stashaway, Syfe, Endowus etc that you can register with and start your monthly investment journey.
In fact, I have accounts with all these 3 Robo advisers companies and have set up my monthly investment plan with them.
In this article, I will show you the Stashaway platform and the results so far.
Stashaway is a robo adviser platform that allows you to invest your cash by creating portfolios based on your risk appetite. They are regulated by Montary Authority of Singapore (MAS).
You’ll get your own portfolio with a strategy designed just for you. That means a mix of equities, bonds, and cash that reflects your profile, not someone else’s. They will personalise your portfolio, but remain objective and efficient so that they can put precision, protection, and peace of mind into every dollar you invest.
You can go to their pricing page to check out the fees that they are charging. For the first $25000, they will charge an annual fee rate of 0.8%. Then for 25000 to 50000, the rate is 0.7%.
To me, it is pretty reasonable. I am not sure for you.
Let me show you my portfolio that I started in Aug 2017. I put in a lump sum of $6000 initially and then set up a monthly $300 deposit.
This portfolio consists of a mixture of bonds and equities. It is pretty balanced and the company will re-optimise the portfolio depending on the economic conditions.
This is my 4th year investing with them and so far the portfolio is up 26% considering I do not have to constantly monitor the portfolio. Last year, when the market tanked in March, I am surprised the portfolio did not go into heavy losses. When the market picked up the later part of the year, the portfolio picked up as well.
Overall, I do not expect this portfolio to outperform the market but at least this portfolio is not so volatile and I can sleep well at night.
If you are interested in the Stashaway platform, you can sign up using my referral link here.
There are many platforms out there and this video is not about comparing the different platforms. The most important thing is to pick one and take action. We need time to let our money grow.
In conclusion, Dollar Cost Averaging is an investment strategy that allows you to buy stocks at different price points, which lowers your risk. It gives you the opportunity to purchase more shares when prices are low and less when they’re high. This means dollar-cost averaging can help you grow wealth over time in a way that minimizes your downside risk (and increases upside potential).
Let me know in the comment section below which method of investing have you used and what kind of results did it produce for you?
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