Let’s admit it, Dollar-Cost Averaging (DCA) or Peso-Cost Averaging (PCA) is boring.
However, it’s the most straightforward and practical approach when investing. With this strategy, you don’t have to worry about the ups and downs of the market nor do you have to do complex calculations in mind.
So what is Dollar-Cost Averaging?
It’s simple: dollar-cost averaging is an investment approach wherein you constantly invest a fixed amount of money into an asset regularly.
Let’s say you’ve committed to investing $100 a month, you can either buy stocks on a specific day of each month (let’s say 1st of the month) or you can split that up and commit to buying stocks worth $25 every Monday. Now this is regardless of the stock price. So whether the market is up or down during the committed day to buy stocks, you will still buy it regardless.
Benefits of Dollar-Cost Averaging
Risk reduction
Since you’re doing DCA, you’re spreading your investments over time. This helps reduce the impact of short-term market volatility. Also, because you’re averaging out the purchase price, you’ll be able to avoid investing a one-time big-time amount during an unfavorable market price.
Promotes a long-term perspective
If you’re going to do a DCA approach, this means that you’re in it for the long term. This approach aligns with the principle of investing for sustainable growth and wealth accumulation.
Emotional detachment from market fluctuations
Because you are investing fixed amounts regardless of market conditions, you don’t worry too much about the current price.
Simple and straightforward
You don’t have to worry about when you should buy or what amount you need to put in since it’s you have a fixed amount and schedule.
Where to apply the DCA approach
The US stock market has an average yearly return of 10%. So it’s good to use the DCA approach when investing in the US stock market or the S&P 500. But since you may not be able to buy all of the stocks, I would suggest doing DCA in an ETF that tracks the S&P500 like VOO, SPY, or IVV.
If you’re looking to do a Peso-Cost Average in the Philippine Stock market, alas, we only have one ETF that tracks the PSEi which is FMETF.
Kuya Well’s Corner
I use the DCA or PCA when investing in a mutual fund and in cryptocurrency. I allocate a certain amount on a payday (which is usually the 10th of the month) and then invest it as is.
Admittedly, there are times wherein with the mutual fund I’m investing in, I tend to see a pattern so there are times wherein I tend to wait before actually buying. On the other hand, I just DCA with cryptocurrency. I learned my lesson not to time the market when it comes to Bitcoin.
As for the US stock market, I have a set amount that I deposit in my eToro account each month. However, as for buying ETFs or individual stocks, I usually wait for the market to be in the Red but I make sure that I use all of the allocated amount for that particular month alone. It’s a deviation of the standard Dollar-Cost Averaging but so far this has worked for me so I’m sticking with it at the moment.
That said, with the way the US stock market moves, I’ll soon go with the standard DCA when investing in VOO.