If you are like me. You’d like to find a no-brainer way to invest. A way that will work long-term, and a way that works through a recession as well.
Dollar Cost Averaging is a mathematically genius way to invest. It requires nothing but a systematic approach to investing.
What is Dollar Cost Average? With Dollar Cost Averaging, you are investing the same dollar-amount consistently. By investing every month, or every week, you will average out your stock purchase price, so you don’t have to time the market.
It is known by most investors that it is impossible to time the market. In a bear market you will not be able to predict the bottom, and in a bull market you will not be able to predict the top.
No one has ever been able to do it, and no one will ever be able to do it.
Dollar Cost Averaging through a Bear Market.
*A Bear market is a short period of time where the market is going down in a hurry. Usually last for a much shorter period than a bull market
In the rest of this post, we can assume that you are putting in $500 into your investment account every month.
In January you purchase your first few shares for $100 a piece. In February they grow to $150 a piece. – Cool right? But now the market plunges in marches and crashes, much like what is actually happening in 2020.
Take a look at my table, of what this would look like for you, if you kept investing $500 a month in one stock over the 12 months of 2020.
But, if you use Dollar Cost Averaging to invest in stocks consistently. Your average purchase price of this stock is $72.92 going out of the year 2020, even though your last purchase of shares was at a price of $150 dollars.
The gains are significant!
With a total purchase value of $5,615 and a new stock price back to high level of $150 per share. You are now holding on to 77 shares, of a total value of $11,550 dollars.
In this fake example you have made $5,935 by systematically buying every month through the bear market, and back up through the spikes again.
The conclusion of this is. Dollar Cost Averaging Works when you go through a Bear market. Do you understand why everyone and all guru’s out there tells you to keep investing, especially through a recession?
Dollar Cost Averaging, and staying out of the worst months in a Bear Market
Just for the sake of it.
Let’s say that you are in panic, you don’t want to invest when it’s all going to hell. You are not selling your shares, you just “keep safe” and stay out of investing until it seems safe to “get back in”.
I the same numbers as before. Just skipping a few months.
You will actually loose a great deal of money. Especially long-term if you don’t buy through the dip!
In this case, staying ot of the worst 5 months as changed your average share purchase price from $72.92 to $106.50 and
By not sticking to Dollar Cost Averaging through a crisis you have lost a significant amount of money. You now own much fewer shares and a much higher average cost. You will not be able to buy at low prices again, before next bear market.
By staying out, you are losing out!
The new Total Share Purchase price is $3,195 compared to $5.615 before. So you manage to keep $2,420 “safe in your bank account”.
But, now you only own 30 shares at a total market value of $4,500 dollars.
Compared to the previous case. If you had kept buying systematically through the bear market you would have owned shares worth $11,550 which is $7,050 more than “keeping it safe”
Adding in the $2,420 you “kept safe in your bank account” you lost $4,630 in total gains by not using Dollar Cost Averaging.
Dollar Cost Averaging through a Bull Market
*A bull market is a longer period of time where the general market is going upwards every year.
This is much more simple to explain.
This is also based on fake numbers, but here are the same pattern of buying in an example.
Buy buying Dollar Cost Average in a Bull Market you will loose out on a chunk of money for a short period of time.
You had $6,000 dollars to invest in 2020. If you had just known the stock would continue to climb and climb you could have bought 150 shares in January and earned a lot of money.
But, if you did that, and 2020 actually happened. If you thought it was a bull market, but we just entered a bear market due to a global crisis of some sort. You would be in great trouble!
Take a look of the chart.
By the end of 2020 you are owning 70 shares. And even though you keep adding new shares every month, your average will never reach the current high.
Thats the beauty of average.
Just for the last example I will sketch out a Bull market. followed by a bear market.
Dollar Cost Average in a Bull Market followed by a Bear market
The following example is a combination of the charts you have seen. Except for that the Bull market is in 2019 in my example.
*Remember, a bull market is a market going up. A bear market is a market going down, for a short period of time.
Taking a look of this chart. You will see the power of mathematics.
By buying for a longer period of time your average will be more and more “normalized”.
If you are doing this for 10,15 or 20 years.
Your average share price. “The dollar cost average” will reflect the average price of the share for the last 10,15 or 20 years.
Imagine if you had been investing $500 every month consistently for the last 20 years in Amazon.
How to know which stock to pick to do Dollar Cost Average
The best thing really, is not to pick stocks.
But, I am actually doing this.
Instead you should be buying an index like the S&P 500. Then you are not depending on ONE stock to make it. But the entire american market to grow.
A look through history is telling us that it has always grown over a longer period of time.
There is ups and downs, but that is the game, and as I showed you in this post, you should USE the ups and downs to stay consistent, when others are panicking
Remember one last Quote:
“Time IN the market, will always beat trying to time the market.”