When is the best time to invest? This is the question everyone tries to answer when thinking about entering the U.S. Stock Market. Some aim to invest when prices are low, while others do so during upward trends. Predicting the market is one of the hardest tasks out there; however, there is a strategy that has proven successful over time: dollar cost averaging. Are you interested in learning more about it? In this article from Hapi, we explain it in a nutshell, including the advantages and disadvantages it presents.

What is dollar cost averaging?

Dollar cost averaging (DCA) is a popular investment strategy that consists of dividing the total amount you wish to invest into equal parts and then investing those amounts periodically, regardless of the investment price. The term was first mentioned by Benjamin Graham in his book The Intelligent Investor.

This strategy is designed to reduce the impact of market volatility on your portfolio and maximize your long-term returns with a lower average cost for your stocks. The idea is to reduce the risk of buying when the asset price is particularly high.

It’s worth mentioning that this strategy usually offers attractive returns for all types of investors, both experienced and beginners. Additionally, it is a valid approach for investing in all kinds of assets: stocks, cryptocurrencies, and more.

What are the main advantages of this strategy?

Reduces the probability of making emotional investment mistakes

It helps avoid common pitfalls like trying to predict the market, buying high, and selling low. Additionally, it can help investors overcome their natural tendency to make emotional decisions. By following a fixed investment plan, investors can avoid the temptation of making rash decisions based on short-term stock market fluctuations. This can be especially beneficial for new investors who may not be sure how to navigate market ups and downs.

Provides greater peace of mind when investing

It reinforces the practice of regularly investing to build wealth over time, making you more disciplined. It’s automatic and can relieve you of concerns about when to invest, reducing the anxiety and stress related to investment.

Helps diversify an investment portfolio

By investing small amounts at regular intervals, an investor can spread their money across a variety of different investments, which could reduce their overall risk. This can be especially useful for risk-averse investors who want to protect their investments from market recessions.

Let’s see how dollar cost averaging works with an example

Let’s say you invest $50 each month for 6 months, totaling $300. When the market is up, your $50 will buy fewer shares, but when the market is down, your money will buy more. Over time, this strategy could reduce your average cost per share compared to what you would have paid if you had purchased all your shares at once when they were more expensive than the average.

1. With DCA

1. Without DCA

As you can see in both cases, the DCA strategy was appropriate to reduce the average cost per share. If you had invested everything in month 1, you would have taken the highest price over time.

Additional points to consider

Despite these benefits, there are also some potential drawbacks to using dollar cost averaging. One of the main issues is that it can take a long time to invest small amounts of money regularly.

Additionally, dollar cost averaging may not always be the most effective strategy in all market conditions. For example, if the market has a constant upward trend, an investor using this strategy may end up with a lower return than if they had invested a lump sum upfront.

In summary, dollar cost averaging is an investment strategy that involves buying a fixed dollar amount of stocks or cryptocurrencies every few months, rather than buying all at once. This is done to reduce the likelihood of investing at a time when the price is particularly high.

To start buying U.S. stock market shares with no minimum amounts and as many months as you like, invest with Hapi. You won't be limited by traditional broker commissions.