Are you looking for hot investment tips to win big in the market?
You’ve come to the wrong place.
I’m not a fan of anything that claims to help you “get rich quick”. Those schemes rarely work unless you’re one of the lucky few who get in early.
I take the tortoise approach to investing, a tried and true method that will help you grow wealth over time: dollar cost averaging.
What is Dollar Cost Averaging?
Dollar cost averaging (also called DCA) is an investment tactic that puts your investments on autopilot. It’s a mouthful of a term for a simple idea: you invest the same amount of money at the same interval for a long period.
For example, I do dollar cost averaging by automatically investing a portion of my biweekly paycheck. Every two weeks, the same amount of money goes into my investment accounts, whether the market is up or down. I don’t even have to think about it – the money just goes.
Why is Dollar Cost Averaging Ideal?
Dollar cost averaging is the best way to invest for one simple reason: it prevents you from trying to time the market.
It’s nearly impossible to invest your money at the right time to win big in investing. Stocks go up and they go down, like a roller coaster without a set track. Regular investors have no idea when the headwinds will change.
With dollar cost averaging, sometimes you invest when it’s up, and sometimes you invest when it’s down. The price you pay per stock “averages” out over time, meaning you don’t risk putting all your money in at the height, but you also lose out on massive gains if you get the market timing right.
It’s the best approach for those looking to build steady wealth over time.
Dollar Cost Averaging vs Lump Sum Investing
Okay, you got me. There is one investment strategy that *could* skyrocket your wealth, but the word “could” is doing a lot of heavy lifting.
The best way to make money investing is the tried and true “buy low, sell high” strategy.
If you have a lump sum, and IF you invest it in a rising market all at once (buying low), you will make more money over time than if you split it up via dollar cost averaging.
Those are two big “ifs” though.
Do You Have a Lump Sum?
First, how many of us have a lump sum to invest? Some may get lucky with an inheritance, lottery jackpot, or settlement, but most of us will rarely have a lump sum to invest.
If you attempt to save the money you would invest from your paycheck for a “lump sum” investment at the right time, you’re now attempting to time the market, and you may lose out on massive gains.
If you don’t have a lump sum, dollar cost averaging will win.
Knowing it’s a Rising Market
The second “if” is timing the market. Even if you have a lump sum, how do you know when it’s time to invest it?
Some folks keep a keen eye on the market at all times and would have a better idea than most. Even they can get it wrong.
Most casual investors have no idea. Although they risk losing out on big gains with dollar cost averaging, they also reduce the chance they’ll lose all their money by investing a lump sum right before a massive market correction.
Dollar Cost Averaging Example
Let’s say you have $1000 to invest. Let’s see how dollar cost averaging works if you invest $200 at a time over the course of a few weeks (we’re not including any brokerage fees in this example).
| Investment Number | Share Price | Number of Shares |
| 1 ($200) | $14 | 14.28 |
| 2 ($200) | $15 | 13.33 |
| 3 ($200) | $15.5 | 12.9 |
| 4 ($200) | $13.5 | 14.81 |
| 5 ($200) | $14.5 | 13.79 |
You spent a total of $1000 and purchased a total of 69.11 shares. On average, each share costs $13.82. The only way you could have beaten that price is if you lump-sum invested all $1000 during the 4th investment instance, when the share price was $13.5. But did you know that share prices would fall that day?
This simple example shows how dollar cost averaging could help you achieve a lower average stock price over time.
However, you could end up paying more over time. If, in the example above, the stock price rose again at instance 4, or was anywhere over $14, you probably would have done better overall if you invested your lump sum in the beginning. That’s why lump sum investing often beats dollar cost averaging if you have a lump sum, but wins out if you don’t.
Why I Prefer Dollar Cost Averaging
When I have a lump sum to invest, I’ll throw it in. I put $10,000 into a Vanguard fund when I sold my house.
But most of the time, I do dollar cost averaging.
Here’s why.
I Don’t Have a Lump Sum
Having a lump sum and saving up a lump sum are two very different things. When I have a lump sum, I’ll do lump sum investing.
But I will not try to save a lump sum for it. With my regular money, I use dollar cost averaging.
Mitigates Risk
Dollar cost averaging isn’t a win-big investment strategy, it’s a risk mitigation investment strategy.
When you invest the same amount each time, you’re averaging out the cost, so you won’t pay bargain basement prices, but you also won’t overpay.
Autopilot
With dollar cost averaging, I put my investments on autopilot. The same amount comes out of my paycheck and into my investment accounts each month.
I don’t have to remember to buy in or check my accounts each month before investing. It’s automatic.
No Thinking About When To Invest
The alternative to dollar cost averaging would be to automatically put my investment money into a separate savings account, then watch the market like a hawk for signs it’s time to jump in.
I don’t have time to watch the market that intently. I don’t have the energy to research every economic and political change that could impact the market.
With dollar cost averaging, I don’t think about investing; I just do it.
May Lose Out on Gains
Because I can’t spend all my days looking at the market, I would likely have lost out on massive gains over the past five years if I tried to wait for the right time to invest.
I probably would have more money if I dedicated my time to buying low, but I would also have made massive mistakes, missed out on crucial trading days, and spent way too much time thinking about it.
With dollar cost averaging, I always have at least some money invested that benefits from market gains. I also risk losing some, but in the end, it averages out, and my investments are worth far more than I paid for them.
Long Term Strategy
My top reason for sticking with dollar cost averaging is that it’s a long-term investment strategy. I’m investing to build wealth over time, not for quick gains.
I’m planning to buy and hold for at least another ten years. Can you imagine trying to time the market every day for that long? It would be exhausting.
I know that with dollar cost averaging, I may buy too high sometimes, but overall, my investments will grow, and I won’t lose out on the biggest gains of each year. In ten years, I may even be a millionaire!
How to Start Dollar Cost Averaging
If you have a 401K through your employer, you’re probably already doing dollar cost averaging! Every time a portion of your check goes into your retirement account, you’re using this strategy to build wealth.
But you can use the same method outside of your retirement account.
Most online brokerages allow you to use dollar cost averaging to put your investments on autopilot.
I use Vanguard, and they make it easy. I can set up an allotment from my paycheck directly to any bank account I wish- including my brokerage accounts, but if you can’t do that, you can set up a monthly transfer from your checking account to your Vanguard account.
Vanguard allows you to create recurring investments in any of its funds. You can set it up to transfer every week, every two weeks, every month, or twice a month, and you can decide which fund it purchases.
I have two Vanguard funds, so I split my automatic investments 50/50, with half going into each. You can set it up in whatever way works best for you.
Although I only use Vanguard, most online brokerages offer similar features, allowing you to easily set up automatic transfers to grow your wealth.
Start Investing
Investing doesn’t have to be hard. Keep it simple with index funds and dollar cost averaging, and watch your wealth grow.
Remember that all investments come with risk. There’s no guarantee that dollar cost averaging will prevent you from losing money in the stock market. However, despite the risks, it’s still the best way to grow wealth over time.