Building Wealth Gradually with Dollar Cost Averaging
Sometime this week, I stepped out for a time in the sun, and I stumbled on the book, I Will Teach You to Be Rich by Ramit Sethi. The first time I read it, I wanted to do everything the book said but the drawback was that I was not sure if my country had any of the solutions presented in the book for me to take advantage of. So I allowed sleeping lie. Finding the hard copy of that book a few days ago, I couldn't pass it off, I stopped, and bought a copy.
This evening, while glancing through, my eyes stumbled on something worth sharing.
The Power of Dollar Cost Averaging (DCA)
Ramit Sethi, in this book, mentioned an individual who always felt like they were always buying at the top and they wanted to stop being the person who buys into the market when it peaks, then finds themselves selling when it crashes. Ramit recommended a strategy that we are all aware of...Dollar Cost Averaging (DCA).
The concept of dollar cost averaging revolves around an investor who consistently invests the same amount of money into his desired portfolio. And he doesn't change or waive, regardless of the price fluctuations in the market.
I was made to understand that the individual only needs to practice DCA instead of depending on hypes and speculations. Seeing that the market often deals mercilessly with those who have little or no knowledge of how it works, it makes perfect sense to practice this.
The trap of always buying at the top and losing out when it crashes can be inevitable for those who do not learn the lessons well. DCA is one of the things we can control because we have to follow through with our plan every day, week, or month depending on what we want.
More is gained through DCA than trying to time the market. Someone who practices this method of investing will make more out of their money. This is because they won't be forced to sell when the market is taking a hit. Besides, there's every chance that they will be earning a high rate of return as the market takes shape and progresses. The best part is that they will feel better and more secure about their investment portfolios. Anyone regardless of their level of knowledge around the market can practice this, and if done consistently, will yield better results than trying to time the market.
Balancing with Diversification
Although DCA is a perfect investment strategy, it doesn't take away the importance of diversification. Having a well-diversified portfolio helps with risk mitigation as well. So even though you want a diversified portfolio, you can combine that with DCA, and win. But by doing this, you open yourself to having different asset classes that take advantage of the principle of dollar cost averaging and reduce how much you expose your money to volatility and risk.