Buy the Dip!: The Effectiveness of Dollar Cost Averaging

If every batter in Major League Baseball could just wait until they got a pitched they like, it would be very hard to be a pitcher. Thus, there is a strike zone and a count, to make the duel between the pitcher and the batter much tougher. In investing, there is no such strike zone, so you have the power to wait for the right stock to the come. When it does, take the biggest swing possible, and keep swinging.

In our recent post about Warren Buffett and Charlie Munger, we discussed this approach they take when they find a stock they love. When the two were fully sold on Coca-Cola ($KO), they bought shares every day, no matter if the stock went up, down, or sideways. They believed in the business plan and the financials of Coca-Cola, and wanted every piece of it they could get.

What is Dollar Cost Averaging Exactly?

By definition, Dollar Cost Averaging (DCA), is investing a specific amount of money into an asset, regardless of the price. For example, John Doe is lucky enough to buy 1 Bitcoin per month. He decides to buy a Bitcoin on the 10th of every month. By doing this, John has eliminated the volatile fears of Bitcoin. On August 10th, Bitcoin could $40,000, on September 10th it could be $70,000, and on October 10th it could be $50,000. No matter the price John buys his 1 Bitcoin because he strongly believes in the long term future of the project.

bitcoin hold

Another way to DCA is by doing the infamous buying of the dip. Unfortunately, stocks can not only go up. But just because a stock or cryptocurrency comes down, doesn’t mean its done. Apple, Microsoft, and Proctor and Gamble are not invincible, they have their red days too. If you take advantage of these low periods and consider them a discount and buy them, you are Dollar Cost Averaging. Buying the dip is sometimes taken in a joking manner, but is practiced by big time analysts.

Breaking Down the Numbers

The benefits of DCA don’t stop at position size, it can really help your wallet as well.

If John Doe is willing to buy Bitcoin at $35,000 on September 10th, and the price of Bitcoin falls to $33,000 on September 9th, he has now saved $2,000. If the price slides to $30,000 in October, John saves himself another $5,000.

Other people see downturns and start to get scared, but with Dollar Cost Averaging, downturns are opportunities. In those two months, John secured two Bitcoins and saved $7,000. Others would have stayed away because of the slide. In 5 years, if Bitcoin is well over $100,000, no one will remember that dip. But will regret not buying more. As the famous quote goes;

“Be fearful when others are greedy and greedy when others are fearful.” – Warren Buffett

Specific Shares or Specific Dollar Amount?

Truthfully, there is not much of a difference between these two. However, when putting a specific amount of money, in you run into having to bump the number up if the price outpaces your contribution. Conversely, specific shares might hold you back if you can comfortably put more than you are.

Generally, as always know your beliefs and your wallet, and constantly look in the mirror as an investor.

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