Dollar Cost Averaging Explained (Best Investing Strategy For Beginners)

Trying to time the market is extremely stressful, and honestly, it's impossible to do. Think about it this way, rationally: when the market dips, how do you know that is the right time to buy if that's the right time to buy, how much do you buy? what if the market dips further then? you bought then because that was the right time, but then you were wrong; but if you had not bought and The market went up, so you're wrong as well. No matter what you do, if you buy when the market First, if the market dips again, there's a possibility you'll be wrong if you don't buy then. and when the market goes up, there's regret that you should have bought then, and even if you did buy There will always be the question of whether I should have bought more, or should have bought less. Should I have spent half of my money now, and then it dipped further and went below half? The point is that striving to be accurate in investing is impossible, especially as a beginner investor or an the untrained investor, the people who are able to accurately time the market like hedge funds Do it using extremely advanced financial models so that you're no longer human—you're just algorithms. that detect slight changes in the market and are able to respond very quickly, but you as an Individual investor, just looking at your stock on your phone or your laptop, you're just not equipped. To be able to make that kind of judgment—what does that mean for you? Does that mean that you? are stuck perpetually making bad investment decisions? No, in this video I'm going to review an investment strategy that averages out your costs and returns in the market over time and especially removes the stress and anxiety associated with making investment decisions such as When should I buy? Should I buy the dip? How soon should I buy, and how much should I buy? Invest if you're new here. Hi, I'm a CFA charterholder and a former investment banker. and I spent about seven years advising millionaires and billionaires on how to make Keep and grow your money, and on this channel I share strategies that will help you build wealth. Just like the investment strategy you are about to learn, I'm going to talk about the strategy. Examples of the benefits—I'll tell you how to implement it, and I'm going to share these tips. in simple, beginner-friendly ways so you can take action from this video today—the strategy is The question here is: dollar-cost averaging, also known as DCA. Now, DCA is an investment strategy where You invest a certain amount of money at regular intervals into whatever asset you are purchasing. Regardless of the current price, this will work if you're investing in stocks or index funds through ETFs. You can apply it, you know, to any of these by applying DCA, you spread your investment into the market over time without having to worry about the dips, spikes, and various movements of the market, and over time what happens is that your average cost gets smoothed out—that's why it It's called dollar-cost averaging. To bring this home to you, I'm going to give you two examples. The first one is let's assume that you typically invest $500 every month and in the first month The asset price is $50; automatically you buy 10 shares. Let's not say in month two the asset The price has dropped to $25. What happens is you buy 20 shares, and then in the third month the asset The price has gone back up to $100; you buy five shares. You can see that the number of shares that you purchase on a month-to-month basis, you know, varies, but the amount of money that you invest Now let's go into Excel and examine the value and rewards of this investment strategy. with an example; in this example, I'm going to compare two strategies, the first one is the DCA the first strategy is dollar-cost averaging and the second strategy is the lump-sum investing strategy, so The first strategy, which is the dollar-cost averaging strategy, this person is investing a thousand Each month, for the lump sum, the person invested $12,000 at the beginning of the year. What you can see here is, at that price, how the asset's price is fluctuating. So in month one, the price is 50; in month two, 48; by month five, 40; by month eight, 37. Now what is happening? For the DCA, the number of shares that person buys varies depending on the month. By the end of the year, the person has 284 shares, so by applying the DCA strategy The person buys a varying number of shares depending on the current price. The first benefit you can Here's the thing—you usually end up accumulating more shares by applying the DCA strategy more. shares of the stock or the ETF or whatever else you're trading by applying this strategy and this Because you are investing a certain amount of money, when the price goes down, you are able to buy more. When the price goes up, yes, you buy less, but the point is, by investing a certain amount of money You can automatically take advantage of price dips to buy more without worrying. about whether you're buying too much or whether this is the right time to buy, since you know that, okay If I invest $1,000 now, I will invest $1,000 next month, and I will keep investing some amount each month. every month anyway versus the person who spent $12,000 in the first month and bought 240 shares This is because when they bought it, the stock price was $50, so they purchased 240 shares. shares, but the DCA investor at the end of the year has 284 shares, the person who bought 240 shares at the beginning of the year is going to have 240 shares at the end of the year, but the person who The DCA strategy has a larger share, which is the first benefit. Now, as we continue examining it, moving forward... portfolio value, the portfolio value for both of them is going to change every month based on the the price of the asset, but because there is a variation in the number of shares that each of them owns of assets that they both own, the number of shares that they both own, the DCA strategy is going to give you a higher return at the end; as you can see here, at the end of the year, the portfolio value using the DCA strategy is about $14,000, whereas the portfolio The value of applying lump sum investing is about $12,000; in fact, we can see here that the lump sum Portfolio investor, you know, we can say they almost lost money right from month two. They start losing money between around month five and month nine, and they're losing a lot of money. compared to what they had invested, and by the end of the year they are back where they started At $12,000, the DCA strategy takes time to ramp up, as you can see it starts from $1,000. and it goes $2,000, $5,000, $7,000, so you have a more steady growth rate in your portfolio versus the lump sum, which starts high at $12,000 and then decreases, decreases further, and then rebounds up to $12,000, as both of them have experienced the same market situation but the outcomes are Why does DCA work? DCA works for three main reasons. The first one is consistency. One important habit when you are building wealth is just staying consistent. I always said on this channel that building wealth is very simple—it just comes down to applying the the same simple strategy consistently over time—consistency is the name of the game, especially if you're trying to win with something like compound interest, DCA enables you to be By setting up recurring investments every month, every week, or every two months, you are staying consistent in the market you are participating in the market every single time versus just investing $12,000 to $20,000 in January and calling it a day, you will not be able to participate in everything that happens throughout the year being consistent in investing is the way you put your Money to work for you—many of us have automated payments for rent, for student loans, for electricity. For subscription using the DCA strategy, you are also able to automate your investment, let's every month or so, but instead of your money just going down the drain like whatever money you Pay for a student loan or for a subscription—once the money is used up, the automated payments stop. Using the DCA strategy builds wealth for you. The thing about DCA as well is that it eliminates losing money due to downtime because you are consistently investing your money, you are Not waiting for the markets to be right, many people will be waiting to time the market, so accumulating money in savings means just saving money and leaving it there, and the money is doing nothing for them, whereas if you are using DCA, you can dip your toe in and your money keeps Growing for you regardless of what is happening in the market. The second benefit is time-based investing. Just like I mentioned earlier, you can automate your DCA strategy so that it runs every week, every month. every quarter, however you like to do it, but by investing early instead of waiting a while you are maximizing the amount of return you can achieve without compound interest, just like someone someone who invests in the second month of the year or someone who invests in the fifth or sixth month of the year so that person has had four months, you know, where their money has been in the market out there working for them, so DCA allows you to simply time your investment and maximize the amount of time that your money is working for you, and the third benefit of DCA, which is one reason why I highly recommend it—it helps you mitigate risk, and the two major risks that investors fall prey to are... are rational, but emotional investing occurs when it comes to investments and money, many of us believe we are rational, yet we are not. are rational, but most of the time it has shown that we fall into a great deal of emotion and mental states biases in investing that we are humble enough to acknowledge by using DCA you remove the anxiety and stress from time to time as the market tries to figure out whether this is the Now is the time to buy; this is the best time to sell. Just invest like a robot, without thinking about it. or without applying emotion, the second thing is that DCA enables you to let go of FOMO, the fear of missing out, many investors follow the pressure of following the market, the market is high, everybody's selling, yeah, I should go and sell; market is low, everybody's buying, oh, I should Go and buy, and like by doing that, like we all know that in general life, when you are following the You are highly likely to make mistakes, but DCA prevents you from doing so—you only dance to the tune of your own drum, which is the automated investment strategy you've put together, so your Money goes into the assets as you have predetermined; you can tune out the noise you can. tune out what the majority of people are doing and save yourself from the FOMO that comes with it I'm just trying to time the market and keep up with every piece of investment news that comes out. Another thing about DCA that's great is that anyone can do it—it's as simple as just setting up a fixed amount of money every month that goes into your investment account and then and it has been invested for you now I know anyone can do it and I'm going to tell you how you can do it it as well, but before I go into that, let me tell you the mistakes to avoid when you are implementing DCA the first one, and this is a very common mistake: not assessing your budget before. setting your fixed amount again, DCA works with you setting a fixed amount that goes into your account consistently now for you to set that amount you need to understand your budget you that you are putting into your DCA is the amount of money that you can afford every month, DCA works with consistency, the same amount of money every month month in, month out, so what that means is, let's say this month you have five thousand dollars to Invest, but next month you'll probably have two thousand dollars; maybe next month you'll have 4K, and maybe next month you have 1K is within your interest to find out what the average is, what's the average amount of money that I can put in if that money is five hundred dollars if it is a thousand dollars, it doesn't matter; what matters is that it is the same amount of money and you can afraid to invest it over time because what happens is if you put 5k now and you put 1k now, you are You're almost falling into the same trap as lump-sum investing, and that is completely very different from DCA that we've discussed here; another thing as well with this The finding from your budget is that if you put too much money into your DCA, let's say, next if you don't need money this month, you won't have to sell your investment, which would completely destroy it. counteract whatever benefits you might have gained by implementing this strategy, so you want To lock your money, you want to put your money there and forget about it; you want to determine an amount of money that you can invest using the DCA strategy and then forget about about no money that you will need next month or that you will need in three months' time, and that's why beforehand Even if you're just starting out with investing or doing any dollar-cost averaging, it's important for you to have emergency savings. When you have emergency savings, it frees up your mind, and you can invest your money. not worried about meeting any emergencies that come with the second mistake people make with DCAs Starting too late, starting too late — you want to start as soon as possible again in investing. Time is always going to be very important when building wealth, and it can work for you or against you. and the way time works for you is by starting as soon as possible—the third mistake that most people Making DCA follow the market and stopping DCA when the market dips—most people Hey, something's happened to the market—the prices have fallen, the stock market has down 60 percent—I'm going to stop investing—that's the worst mistake you could possibly make Again, DCA is all about consistency—same amount, same month, same time every month or every day or Every week, no matter what happens in the market, if the market dips, great—you invest; if the market goes up, you invest anyway. Great, you invest if the market stays the same. Great, you invest—you want to be like David Gargit, right? You run every single time, whether it's raining or not. You're in the market now, let's go. Talk about how you should do this first before you even start out your emergency fund. Once you have an emergency fund and you're ready to start dollar-cost averaging, you need to open a brokerage account. There are many platforms where you can do this, and I have a video coming up about brokerage accounts. Make sure you subscribe so you don't miss it, but many online apps allow you to do this better. Wealthfront, Robinhood, and so on and so forth—when you open a brokerage account, you want to Set up recurring transfers from your checking account to determine the amount of money that you can Use for the DCA strategy one hundred dollars, five hundred dollars, one thousand dollars, and set up automatic transfers from your checking account for that amount of money into your brokerage Log in to your account and then set your brokerage account to purchase a fixed amount of an index fund ETF or your stock. based on how much money you've transferred into that account, so this is very easy—you can set it up in 30 minutes, and I really encourage you to take action from this video starting today, now as I mentioned that your DCA only works if you are consistent with the amount of money that you You're investing over time, and the only way you can figure this out is by knowing what your margin is. I have a video that I'm going to link here about determining your margin. Your margin is the the difference between your income and your expenses, and in that video I'm going to talk to you about How to determine the exact amount of money you have as your margin, which is important to you to implement the DCA strategy, go and watch that video and let me know what you think about it Comment section below, thank you for watching my video, I'll see you in the next one, until then. Stay rich and definitely live your wealth, goodbye.