Daily Cost Averaging (DCA) simply means you buy shares in a stock or fund on a regular basis. This is usually done per paycheck or per month. The idea behind this investment plan is to continue to buy shares no matter what the cost. The overall hope is in the long run the stock would be worth more than the average or what you paid for it. Simple, right?
The reason I would recommend DCA is due to its simplicity and it can work. You will hear many an “expert” tell you how this is a very bad investment strategy. Usually, they just want to sell you their services. After a few years of following the market, I have come to the conclusion; the best you can get from an expert is an educated guess. Try watching CNBC for a few days. Are you confused? It’s not your fault. You are watching advice from people who just aren’t sure about their judgment calls. In addition, they continually change their mind due to every little piece of information that comes out. You are incapable of doing this because you have a life.
Let’s cover three negatives associated with DCA. So, when someone tells you it’s a bad idea you can think about it.
The stock you are purchasing continues to go down and never regains its former status. A good example would be if you started to invest in Cisco 5 years ago. Yes, it might climb back up but I would not bet on it. Take a look at the graph below. It plainly shows this would have been a bad investment strategy.
So, how do you use DCA without falling into this trap? Well, it’s called index funds. Index funds take a sampling of a multiple of stocks and package them together under a mutual fund. The most popular would be one that matches the S&P 500. So, instead of buying shares of the top 500 companies in the United States one by one, you can buy shares in an S&P 500 index fund and own a little of each company. Now, every fund manager will tell you they are a better option. However, few are able to beat the index. It’s common knowledge that an index fund will beat 75% of all other funds in its niche.
Why buy high when you can buy low? The stock market is a series of ups and downs. It is never a straight line. So, why would you buy when the market is high? Using Daily Cost Averaging is usually set up for automatic buying. The fact of the matter is most people are not going to watch the market to determine the correct time to buy. Worse yet, they will wait till it drops, buy some stock, watch it fall lower because they did not call the bottom, panic because it’s going even lower, sell at a loss, and then kick themselves forever when it goes back up. Take the debacle in 2008. At around the 7,000 mark, I changed my 401K contributions from 5% to 15%. Why did I do that? At that point, either the market was going to go back up or our money wasn’t going to be worth anything anyways if it hit zero. This was one of the good decisions in my life. In addition, I still believe our market will top 16,000 again. Why? History says so.
Is anyone promising a better option? If they are, get it in writing. Be sure not to show up on American GreedOtherwise, I’m sure this makes sense and it’s an option you could consider. After all, this is the whole thought process towards 401k plans and people won’t tell you they are a bad idea.
Disclaimer: I have no formal financial training; just a hobby of reading about investing.
India is projected to be the next break out market; just like China recently was. Some stocks like Baidu.com had fantastic returns. I was considering buying an ETF with India exposure; possible something like the WisdomTree India Earnings Fund. What are some major concerns you find when thinking about the India Stock Market?
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