Catching A Falling Knife: Dollar Cost Averaging
For investors, there unfortunately is no crystal ball where we can make all of the best trades. If that were the case: we would all be rich, and I would be out of a job. So far we've learned what criteria we should use to grade a stock, now it comes down to when you buy it. Let me save you some time... You'll never buy at the very bottom. However, with the wonderful strategy of DCA (Dollar Cost Averaging) it's now possible to extend gains and shorten losses. Let's dive in!
DC what?
DCA is the process of moderately buying a stock to average the average share price you bought it at. For example, if you have $1000 to spend on one stock and you put all $1000 in at one time, whether it goes up or down, you can't change your position as it was already your max budget. With DCA, you would split up your buying power into maybe 4 purchases of $250; that way if the stock goes down after your initial purchase you have more capital to put into the stock so it averages to a lower average share price.
Purposeful Buying
The goal behind DCA is to remove the guesswork out of investing. Many times you think that you timed the bottom perfectly, then the stock goes down 10% more. DCA is also a trading discipline, if you put this into practice in every time you buy stock, your trading routine will be plenty more predictable and enjoyable as their is no need to stress watching your investment fall – if your confident it will succeed, DCA the desired stock and catch the falling knife!
DCA obviously has the drawback of minimized returns if you don't put all of your desired capital into the winning stock. Personally, I will put in an amount of capital that is not dependent on me to DCA it (so the returns aren't small), but also if the stock goes down I'm comfortable dumping more capital; the perfect sweet spot!
DCA is a great tool that you should implement into your portfolio the next time a buying opportunity comes your way. Make sure to plan out where your desired buying(s) happen thoroughly in case the stock goes down more then expected. Happy investing!
*This article is for informational purposes only and does not constitute financial advice. Investing in securities involves risk, including possible loss of principal. Past performance is not indicative of future results.