Introduction
“Buy low and sell high”! You’ve surely heard this phrase thrown around as the ideal way of beating the stock market. But in the real world, doing so is extremely difficult to predict – and even experts are unable to know the changes of the market in advance and consistently. Timing the market is notoriously hard, and many cocky investors have been financially humbled by doing so.
On the other hand, deciding when to put in your money (and how much) is necessary at some point. Especially in situations like the current market, it is hard to gauge whether we are near a bottom buying opportunity, or there are still losses to go. For example in China alone, the Shanghai Stock Exchange has bounced between 2,860 and 3,720 in just the past year alone, while Chinese (and overseas) tech stocks have experienced even far greater and more volatile swings in recent times.
So how do you protect yourself from the stress and regrets of entering at the wrong time? The answer is Dollar-Cost Averaging. We’ll check out what Dollar-Cost Averaging is, what are potential benefits, and how you can use it with your ExpatInvest account at no additional cost.
What is Dollar-Cost Averaging?
Dollar-Cost Averaging (DCA) is a strategy of investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price. This can be done by buying stocks, exchange-traded funds (ETFs), or mutual funds. If you’ve used 401k or other similar plans in the past then you likely have actually done this, without even knowing.
Of course, prices don’t only move one way. But if you divide up your purchase and make consistent buys, you’ll maximize your chances of paying a lower average price over time. In addition, dollar cost averaging helps you get your money to work on a consistent basis, which is a key factor for long-term investment growth.
Dollar-Cost Averaging performs the best in:
1) Falling and uncertain markets
2) Over the long-term in nearly any market scenario
However, in high growth and short-term market situations, dollar cost average may under-perform other strategies.
The Main Benefits of DCA
1) Removes Emotion (and Reduces Stress)
By utilizing the dollar-cost averaging strategy and having a set recurring contribution, your emotions are removed all together. This can give discipline to sticking with your plan, and also bring you good investment habits. It also eliminates a lot of stress and potential FOMO/regrets but getting into or not investing in certain things at a time.
2) Helps Long-Term Planning
Dollar-cost averaging provides you with the ability to seed the market with small sums of investments. By doing so over a long period of time, you can take advantage of longer-term investment gains, especially if you are under the age of 50.
3) Avoid Market Mis-timing
As mentioned before, it is very difficult (as well as time-consuming) to try to time the market. No one can predict where the market is going at any given time. By having multiple recurring contributions, you are always investing in the market.
Are There Special Situations Where I Could Adjust the Amounts?
While Dollar-Cost Averaging in general means investing the same amount every month, there are situations where you could adjust the amount (while still continuing to invest) based on either changes in income, or market conditions. Let’s take a look at examples of both of these.
SITUATION A: Your cash income or balance has big changes and you need to adjust
In normal Dollar Cost Averaging, you put the same amount of money into investments, regardless of the situation. This is good in theory, however the real world does not always cooperate with these ideals. Maybe you are looking to make a large purchase such as a car or house, or the current month is especially tight on money. Or maybe conversely, you have just received your 13 month bonus or gotten an inheritance.
For this, you can use some adjusted Dollar-Cost Averaging strategy. While you should always put some in each month, the amount could change. For example, in normal months you put $1,000 into your account automatically. But on challenging months you put just $500, while when you have more extra cash you add $2,000. In the long-run, the positive effects of Dollar Cost Averaging would still apply, as long as you have the discipline to constantly some amount in each month.
SITUATION B: You want to adjust your DCA due to special market conditions
While Dollar Cost Averaging in general does not encourage timing the market, there are certain cases where amounts added in can be adjusted due to conditions. For example, in a case where markets have recently experienced very heavy growth and are in a bubble-like state (such as in 2021), it is possible to consider to deposit less into the market. Conversely, when markets have experienced significant drops, you could consider to put in some more each month.
As a warning though, it is not easy to always tell the tops and bottoms of the market – and this type of adjustment is more for advanced investors. Especially in regular times, it is better to stick with a consistent amount when possible.
Whether you choose make some adjustments in your amounts due to your life or market situation, the important thing is to always put some into the market every month, no matter what. This will keep you disciplined and also protect you from unexpected changes and volatility.
How Do I Start?
Do you want to put your hard-earned money in China to work, but not go all-in (or all-out) at once? Contact the ExpatInvest team and set up a monthly schedule plan that you can Dollar-Cost Average into. In general, you’ll have better long-term results this way, and will also lessen your stress of potentially taking heavier losses by putting everything in at once. Because ExpatInvest fees are based on percentage of total money managed, you won’t pay any additional fees for using Dollar-Cost Averaging.
Meanwhile, now is a great time to start DCA’ing in some funds to your accounts, with many markets way down from their recent highs. While they still might experience short to mid-term volatility, by Dollar Cost Averaging starting now, you’ll achieve better long term results and boost your portfolio in a safe and effective way!
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