Care-free investment with Proven Returns via Dollar Costs Average (DCA)

In my previous blog post, I promised to talk about Dollar Costs Averaging (DCA) strategy, a strategy which is so powerful and simple that an average Joe on the street can master it well if he/she stay disciplined with the pre-planned actions. Let us dive deeper into the topic!

DCA refers to an action where the individual investor puts a fixed amount of money to purchase the underlying stock, ETFs, mutual funds, or any related equity in a recurring timeframe (fortnight, monthly or quarterly). The quantity purchased each time can be varied, but it is recommended that the investor buys a fixed amount of shares each time. Such strategy requires little to no technical knowledge, and it helps the investor to withstand any potential volatility (psychologically) in the market because what is required from the investor is his/her discipline in executing.

I understand that some of you may find my earlier statement not very convincing because if DCA is so easy, why there are still so many investors who is losing money? Well, my answer to that would be lack of discipline as well as execution.

Let’s see how DCA works on a stock that I have made up myself (Gavin Chiu Invest: NYSE: GCI):

An investor is able to benefit from DCA’s investment method in the long run, as he/she is buying no matter what direction the market is heading. From the table presentation above, we can see that DCA trains our discipline and builds our mentality throughout the market ups and downs. During market downs, we are still consistently purchasing a fixed number of shares which helps to “average down” our average price. By employing such strategy, we are trained to ignore market noises and volatility as long as we invest in fundamentally good stocks or index ETFs (index ETFs provide greater stability over stocks). The converse holds during market ups, where we are “averaging up”. Although in the short run, DCA may cause our average price to be higher than the prevailing market price, we can still manage to “Beat the Market” over the longer term (Figure 1 vs Figure 2) if we stay consistent with our DCA investing strategy.

Figure 1: Short-term (1 year) DCA on SP500 ETF

Figure 2: Long-term (8 years) DCA on SP500 ETF

Ending off the topic on DCA, I would say it is an extremely good strategy for newbie and/or time-lacking investor as it is just a plan to follow and execute at each period. A fact of truth is that it is never easy to time the market bottom. Even the top 1% of trader can never time exactly where the market bottom is. Technical analysis is an art, and it serves as a support to a trader’s analysis on the next price movement of the underlying stock(s). However, technical analysis does not guarantee a 100% accuracy. For me personally, I practiced and executed DCA strategy on my investment portfolio where certain portion of gains from my trading account are diverted to the investment portfolio to DCA on both index ETFs as well as fundamentally sound stocks like Google.

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