Dollar-cost averaging is often maligned, disdained, and denigrated. Market timing is much sexier. Maverick (Top Gun), Dirty Harry, Danny Ocean, or Blake (Glengarry Glen Ross) would predict the market and not hedge their bets. Hedging, according to the broke “alpha” males is for cowards, jellyfish, and myopic.
They’re wrong. Timing the market is a sucker’s bet and there is a better way.
Dollar-cost averaging (DCA) is a disciplined form of investing. DCA involves investing a fixed amount of money for a set period of time. Price, when dollar-cost averaging, is irrelevant. The dollar-cost averaging strategy helps remove the emotional component of investing.
Dollar-Cost Averaging — Benjamin Graham
Benjamin Graham coined the term dollar-cost averaging in his book The Intelligent Investor. Practicing dollar-cost averaging, according to Graham, resulted in favorable pricing for an entire investment.
Graham writes the following in the book: DCA “means simply that the practitioner invests in common stocks the same number of dollars each month or each quarter. In this way, he buys more shares when the market is low than when it is high, and he is likely to end up with a satisfactory overall price for all his holdings.”
Here’s a link to a free eBook of this classic.
Dollar-Cost Averaging — The Bible
Is there a Bible verse that supports this concept?
Proverbs 13:11 Riches gotten quickly will dwindle, but those who acquire them gradually become wealthy.
Dollar-cost averaging is a systematic and gradual approach. One does not need $5,000 to begin. Beginning with as little as $5o with most companies is possible.
Ecclesiastes 11:6 Sow your seed in the morning, and at evening let your hands not be idle, for you do not know which will succeed, whether this or that, or whether both will do equally well.
Are we buying high or are we buying low? No one truly knows. My Twitter friends think that they do. They sound confident but they’re in the dark with everyone.
A Christian’s BFF?
Dollar-cost averaging is awesome and it will become your best financial friend (BFF). It’s not forever, though.
Why will DCA be your BFF?
Investing can be emotionally draining. Keeping up with the stock market’s volatility can be depressing. Benjamin Graham created another popular term in The Intelligent Investor: Mr. Market.
Mr. Market was an allegorical investor created by Graham. Mister Market was driven by massive mood swings, fear, and panic. He perfectly defines the majority of stock market speculators.
Dollar-cost averaging minimizes the emotion and wild mood swings associated with investing.
How?
A predetermined investment amount and frequency are established.
Imagine that you’re investing $100 per month for an entire year. Your chosen investment day is the 1st of the month. You have decided to invest in an exchange-traded fund (FDVV) to ensure proper diversification for an entire year.
When the year is up, the strategy is reevaluated.
Some months the cost will be high. In other months the cost will be low. The average is the sweet spot.
The high point for FDVV was $41.75 and the low price was $33.48. The dollar-cost average price was $38.63, though.
Self Control
Investing requires self-control. We want to make proper decisions but we typically don’t.
Missing the ten best market days each decade (DECADE!) from 1930 — 2020 would result in a total return of 28%. That’s an unacceptable return over that time period. If a person remained in the market during those times and didn’t attempt to time the ups and downs, the return would be 17,715% (CNBC)
Quite the difference.
Timing requires advanced intelligence and off-the-charts emotional stability. Most of us do not have those traits.
Dollar-cost averaging is a better option for us.
The talking heads on CNBC talk about the market in real-time. That’s similar to discussing weight losses and gains minute by minute. It’s ludicrous.
Galatians 5:22-23 But the fruit of the Spirit is love, joy, peace, patience, kindness, goodness, faithfulness, gentleness, self-control; against such things there is no law.
A person with self-control can put a plan and place and follow it. Those without self-control change with every little breeze.
Warren Buffett on Dollar-Cost Averaging
I will leave you with a quote from one of the most brilliant investors of all time, Warren Buffet:
“If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”
Warren Buffett
Warren knows a thing or two about investing.
I dare you to profit!