First up, if you don’t already know what DCA (Dollar Cost Averaging) is, then you should check out this in depth article in Investopedia explaining what DCA is.
The simple explanation that I know, is investing a fixed amount of money at a regular interval (weekly, monthly, quarterly) for a long enough period of time.
What should you invest in?
The type of asset or stock that you choose to DCA is the most important factor. Let me show you 3 examples.
We will start at 2009 because that was when the 2008 financial crisis happened. So it would be the absolute bottom of the market at that time. A great time to start to DCA.
Example 1: DCA $500 from 2009 – 2022 into BB (BlackBerry)
Total Investment: $84,000
Current Valuation: $$40,609.44
P/L: -$43,390.56 (-51.66%)
Example 2: DCA $500 from 2009 – 2022 into ES3(STI Index)
Total Investment: $83,500.00
Current Valuation: $90,847.68
P/L: $7,347.68 (8.80%)
Example 3: DCA $500 from 2009 – 2022 into SPY (S&P 500)
Total Investment: $84,000
Current Valuation: $178,914.44
P/L: $94,914.44 (112.99%)
Calculations are done using historical price from Yahoo Finance. You can check out the googlesheet that I did the calculation here.
| Type of markets | Returns if you DCA $500 monthly from 2009 – 2022 |
|---|---|
| Down trending stock/ETF (e.g. BB) | -$43,390.56 (-51.66%) |
| Sideways stock/ETF (e.g. STI) | $7,347.68 (8.80%) |
| Up trending stock/ETF (e.g. SPY) | $94,914.44 (112.99%) |
These are 3 typical markets that we usually see: down trending market, a sideways market and a up trending market.
From the data above, we can see that the worse performing is the down trending market. Cheap doesn’t mean you should always DCA, or buy the dip. Cheap stocks can get cheaper.
You won’t lose money DCA-ing into a sideways market. But I’m not sure if you will beat inflation with it.
Best performing is when you DCA in a up trend market. You might be buying at higher prices when you DCA, but there is more money to be made in an up trend market.
So when deciding what to DCA, don’t look at the price. Try to find a stock or broad based index ETF that generally goes up in the long run. Personally, I prefer a broad based market index ETF like S&P500 over individual stocks.
When should you start Investing?
The best time to start investing is 10 years ago.
The second best time is now.
In fact like now (at time of writing), S&P500 is down like 15% from all time high (ATH), this seems like the perfect time to start. You are not buying at ATH. There is a discount of 15%. What are you waiting for?
How to start Investing Using DCA strategy?
There are 3 factors to consider.
- how much money to invest
- how often you want to DCA (recommend at least once a month)
- how long is your investment time frame (recommend at least 5 years)
Once you have decided on the above, you have to stick with it for DCA strategy to work.
You cannot decide that during the market downturn, you want to stop investing because you cannot stomach the losses. If you have selected the right asset to invest, a down market is an opportunity to buy more at a discount.
If you can, try and automate your DCA investment. Don’t do it manually. Because automation takes away the emotion and forces you to invest even in a market down turn.
If you reside in Singapore, there are a lot of robo advisors that provide this service at a small fee. I personally use Autowealth, Endowus and Syfe for different purposes. You can check out the affiliate page for referral links.
Summary
As we have seen from the charts above, the what to invest in is the most important piece when it comes to DCA-ing your investment.
You can start now, and have your investment automated and commit to investing for a long period of time. But if you invest in the wrong asset, you would have wasted your time and money.
So make sure you do your homework on the What, and once you get that right, the When and How are the easy parts.
As always, none of what I write should be taken as financial advice.