This strategy is to manage a portfolio and maximize total return. Value investment is long-term, and the goal is to buy low and sell high.
Nobody is able to time the market based on how low it will be or how high it will go. We mostly buy stocks that are undervalued when the price drops. But what if, after buying stocks at that time, the price drops more?
Thus, the dollar cost averaging strategy helps you to neutralize short-term volatility in the broader equity market and increase your long-term profitability.
DCA is the strategy used to average up or down your buying price and increase your profitability over a long period of time.
If 3 people invest in the market, the first two invest by targeting the market, like one has luck and invests and stocks go up, and the other has bad luck and invests and stocks go down.
But the third one who keeps on investing without targeting the market is DCA.
Example: You have a $10,000 investment fund, and you would like to buy stocks worth $2000 each.
$10,000
⬇️ ⬇️ ⬇️ ⬇️ ⬇️
$2000 $2000 $2000 $2000 $2000
By applying the DCA strategy, instead of putting $2000 all at once, try putting half of it and reserving the other half for future opportunities.
$5000
⬇️ ⬇️ ⬇️ ⬇️ ⬇️
$1000 $1000 $1000 $1000 $1000
Therefore, if the price drops further by maybe another 8%, you can only use your reserved cash to buy more.
By doing this, you will be able to average down your buying price and become more profitable in the long term. Also, you will always reserve enough cash for future opportunities.
So if $10,000 is invested all in one, then if the price drops, there is no more cash to buy in more, hence losing a better opportunity to buy a strong company with a more undervalued price.
Conclusion:
Don’t try to time and beat the market.
Always reserve cash for future opportunities
Don’t go ALL IN
Timing the market is one of the worst mistakes investors make. Don’t think you will miss the train or lose the opportunity.
The stock market will never lack opportunity; the only thing lacking is advance cash for investing.
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