The dangers of doing dollar-cost averaging blindly

Dollar-Cost Averaging. An investing technique that:

✅ Minimises your risk by spreading your investments over a period of time

✅ Has the potential to reduce your overall average cost of investment

✅ Creates self-discipline to stay invested in the market

These are potential benefits that made the Dollar-Cost Averaging (DCA) strategy so popular.

The idea of investing a smaller sum regularly is often less scary to beginner investors as compared to going all in with a lump sum.

The main idea behind it is basically to manage your risks.

However, are you really taking the safer route to invest?

There are also certain dangers in this investment strategy, and if you are not careful, it can potentially become a costly mistake.

So if you are DCA-ing, watch out for these potential pitfalls.

At The Money Folks, we help our clients invest and build multiple income streams that potentially enable them to retire with more than $1 million. Reach out to us for a financial assessment call (by application approval only).

Disclaimer: This post represents our personal views and opinions and is neither associated with any organisation nor reflect the position of any organisation. This content is also only for informative purposes and should not be construed as financial advice. Past performance does not necessarily equate to future performance. Please seek advice from a Financial Adviser Representative before making any investment decisions.

1. DCA averages out the cost per unit, but is this always the best strategy if you know how to time the market?

Many of us understand the concept of DCA. If an investor invests using this strategy, they would typically systematically invest a fixed sum of money at regular intervals (eg. investing $1,000 a month) into an asset. This is usually done so over a long time frame, often over 10 to 20 years or even longer.

The key principle behind this is to overall reduce the impact of price volatility and average out the cost of investment over time.

It is a very solid strategy especially for investors who are not full-time investors and do not want to spend time studying and timing the market.

However, if you have a very strong understanding of your asset, its fundamentals as well as its projected potential, are certain that it would grow even more over a certain time frame, and are confident about timing the market, should you still DCA?

If you have done your due diligence and you are certain when to enter the market, you could potentially lower your cost of investment (and hence potentially have higher returns overall) with a lump sum strategy.

For example, below is what happens when you invest a $250 lump sum versus $50 for the next 5 months to DCA in a particular asset and the price continues to increase over time.

For illustration purposes only.

Based on the illustration above, with a higher price per unit, it means you are actually buying fewer units of the stock with the same amount of money, thus increasing your cost.

But this could only work to your advantage if you have a strong fundamental understanding of your investments, such as whether they have long-term profit and growth potential, as well as a very solid understanding of timing the market at the right entry and exit points.

Otherwise, a DCA strategy might be more suitable for you.

If you are DCA-ing via robo-advisors to average out costs, you can read more here if this investment strategy and platform fits your investment profile and goals.

If you are unsure, it is better to consult a professional before making an investment decision.

2. Would you end up DCA-ing blindly?

In the nature of the DCA strategy, you would need to invest consistently over a long period of time.

And because of this, the tendency to be too hands-off in your investments is very high.

When we invest in quality assets such as blue-chip stocks or funds with good track records, we may become too comfortable and might assume that the assets will remain resilient despite market conditions.

Although such assets are perceived to be quality investments — the reality is that every investment involves risks, be it in stocks or funds.

Businesses are susceptible to macroeconomic risks such as commercial and geopolitical risks.

Commercial risk is any factor that can get in the way of any business’s success.

For example, how relevant is the business in the current industry?

Compared to its competitors, does it have a relevant business model to remain profitable and sustainable?

Furthermore, are the assets you are invested in exposed to any political risks that might influence your investment value?

As an example, since late 2021, the change in regulation policy posed to Chinese tech players caused a major, prolonged plunge in the valuation of their stocks.

This can be seen in one of their technology stocks fund, KraneShares CSI China Internet ETF (KWEB).

For illustration purposes only. Source: Finviz.com

The prolonged price slump may seem like a good time to lower your cost, but would you know when it will ever bounce back?

Do you have the time horizon to ride out the volatility?

Have you considered what are the Chinese government regulation plans moving forward?

This plunge had been prolonged for a significant amount of time and only time can tell when Chinese tech stocks could recover.

One thing certain in investments is that the economic and physical environment will change over time.

So DCA-ing blindly might not always work in your favour.

But with change, there might be better investment opportunities out there that can give you better returns in this investment climate.

Investors need to flexibly realign their portfolios to protect against losses and take advantage of new opportunities. This requires regular monitoring of your investments, which requires time and energy.

Hence if you are DCA-ing, it’s important to diversify your investments, keep an eye on new opportunities and prioritise effective asset allocation based on your risk profile and goals.

Feel free to reach out to us for a comprehensive financial assessment so you can DCA confidently with a recession-resilient portfolio.

3. DCA removes emotional influence in investing — but is this realistic if you are doing so on your own?

The DCA strategy generally assumes that an investor is investing in a disciplined manner over a long period of time. But as humans, realistically, we can be easily influenced by our emotions.

What if you lose confidence in your investments during turbulent market conditions?

Especially if you are a new investor, market turbulence can be tough to stomach especially when it’s your first time experiencing it.

Can you imagine putting more money into something that is making huge losses?

Would you be able to resist pressing the “stop” button?

If you are investing on your own (i.e. through Robo-advisors or other platforms), it can be easy to manually trigger and stop your DCA altogether.

Market volatility can majorly influence our emotions as not everyone is able to stomach losses well.

Likewise, not everyone is able to be objective when the market is doing better.

If you are investing more when things appear rosy and prices are high, but investing less when there’s a market downturn, you might be increasing your cost of investing altogether.

In order to remove this emotional influence in your investment strategy, you need to review and reassess your invested assets regularly, understand the valuations of your investments as well as the market conditions.

This way, you can potentially avoid making losses or mistakes that can deviate from your goals.

It is a good idea to reach out to a professional third party to give you objective advice when there are changes or uncertainties in the market.

So what investment strategies can you use?

Besides DCA, there are other strategies you can use to manage your risks and potentially reach your goals.

One such strategy is called Dollar-Value Averaging (DVA), where you buy more of an asset when prices are lower and buy less of an asset when prices are higher.

For illustration purposes only.

However, this strategy requires you to have regular up-to-date information on your assets’ valuations, as its objective is to capitalise on temporary price corrections.

Besides that, lump sum investing can also be advantageous to you when done right.

Sometimes, when the price valuation is fair and you are confident with your research, lump sum investing can potentially be a very profitable investment decision.

Whatever strategy you choose, it boils down to the valuations and fundamentals of your investments. Your strategy would need to reflect your risk profile as well.

If you are not confident about growing your wealth on your own, at the Money Folks, we specialise in managing and growing your wealth for you.

Most of our team is recognised as the top 5% of financial advisor representatives worldwide, and many of our clients are on track to potentially achieve their retirement goals 10-15 years earlier than planned.