The Dollar Cost Average (DCA)or, translated into Spanish, the average price in dollarsis an assertive investment strategy in which an investor divides the total amount to invest through periodic purchases of a specific asset, in an effort to reduce the impact of volatility on the general purchase.
Because purchases occur regardless of asset price and at regular intervals, this strategy eliminates much of the detailed work of trying to time the market to buy stocks at the best prices, as well as shielding people from psychological pressure caused by market volatility. market.
Why use DCA?
DCA is very friendly to the small investor, especially for those who are new to investing, it can be very complex to analyze market charts and indices to understand where or when to put your money.
Many people believe that because this strategy is simple, it can’t possibly be really good. But considering that it is almost always impossible to know precisely the top and bottom of assets, always buy at the bottom and always sell at the top is a relatively utopian strategy.
Preoccupation with finding the perfect time to invest in an asset leaves portfolios highly exposed to volatility and, although it seems to be the most common behavior, it can be detrimental to earnings when too much of the funds are invested without considering value correction .
How does DCA work?
Unlike this buy low, sell high strategy, DCA is not intended to give the highest returns possible in a short period of time. Instead, it is about giving investors more security and stability in their wealth creation.
Decision making for this strategy is based on systematically investing equal amounts, spaced at regular intervals, regardless of price. Therefore, by committing to a DCA approach, investors avoid the risk of making decisions based on greed or fear.
That’s why DCA can help you achieve more successful results, purchases are made every day, every week or every month. This allows an investor to follow the movement of prices, both high and low. The cost of the investments may be minimal, but as long as they are constant, the returns will follow.
How to start doing DCA?
Regular investment in stock funds favors investors in assets such as cryptocurrencies due to its long-term prospects. If, on the one hand, the investor is subject to short-term volatility and will end up buying high at times, on the other hand, the probability of further long-term appreciation is quite high.
Suppose you want to invest $50,000 in the cryptocurrency of your choice, a practical example of DCA would be investing $200 per month instead of investing in full. In a few months, cryptocurrencies will have a very high dollar value, meaning your investment may not accumulate as much in conversion. But in other months, when the value of the cryptocurrency is low, the conversion would bring a more satisfactory value to the investor.
As mentioned before, this strategy can be done every week with a smaller amount.
The DCA, instead of exposing the investor to the risks of buying at the bottom and selling at the top, allows profits to follow the average valuation, provided the investor is patient and takes a long-term view.
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