Cost averaging – often called dollar cost averaging or DCA – is an investment strategy in which you build your portfolio by investing equal amounts at regular intervals. For example, you might purchase 100 € worth of Bitcoin every week or every month.
Experts say cost averaging is a good strategy for minimizing risk in volatile markets. It’s appropriate for long-term investments like saving up to buy a house or pay for retirement.
And you can start today with Kriptomat Recurring Buy.
One of the benefits of cost averaging is that you are relieved of the task of timing purchases based on predicting whether prices will rise or fall. Even the most experienced investment advisors bungle those predictions much of the time. With cost averaging, you make the same purchase every week or every month regardless of prices.
Cost averaging minimizes the impact of market volatility. You don’t risk losing your nest egg by making a big buy when prices are at a record high. The flip side of this benefit is that you won’t reap a huge reward by making a big purchase when prices are uncommonly low. (Of course, if you believe prices are due to rise, you can always make a purchase separate from your regular investing schedule.)
Another benefit is that making small regular purchases can be a painless way to invest. It’s hard to come up with a lot of money to make a big crypto purchase. But you might never miss the 100 € to 200 € that you’ve set aside for portfolio-building with recurring purchases. You could pay for your retirement by taking your lunch to work two days a week instead of eating in a restaurant. Your portfolio will grow with little attention, effort, or inconvenience.
Cost averaging in practice
Part of what makes cost averaging work is that you accumulate more assets when prices are low. Here’s how it works. Let’s say you set up a 200 € per month recurring buy of an imaginary cryptocurrency called SurlyCoin, which is trading at 100 € per coin.
Let’s look at a hypothetical example spanning six months.
|Price||Purchase||Coins purchased||Portfolio value|
|Month 1||100 €||200 €||2||200 €|
|Month 2||50 €||200 €||4||300 €|
|Month 3||50 €||200 €||4||500 €|
|Month 4||100 €||200 €||2||1,200 €|
|Month 5||200 €||200 €||1||2,600 €|
|Month 6||100 €||200 €||2||1,500 €|
The average SurlyCoin price for the six-month period is 100 €. You’ve invested 1,200 €, so you might expect to have 12 coins worth 100 € each. But with cost averaging, your monthly investment earns you more coins when the price is lower. You have 15 coins, not 12. You paid an average of just 80 € per coin. If the price rises by 100 € next month, you’ll earn 1,500 €, not 1,200 €.
It is this dynamic that makes cost averaging such a good strategy for long-term investments. If the market rises over several years, the value of your earlier investments is multiplied.
The bottom line
With cost averaging, you don’t need to worry about timing the market and predicting whether prices are about to fall further or rebound. You’re not competing with expert investors. You’re employing a time-tested strategy for avoiding risk and minimizing the effects of market volatility.
The easiest way to get into cost averaging is the Kriptomat Recurring Buy program.
This text is informative in nature and should not be considered an investment recommendation. It does not express the personal opinion of the author or service. Any investment or trading is risky, and past returns are not a guarantee of future returns. Risk only assets that you are willing to lose.