This week’s Market Round Up is brought to you by Sahil Bloom, who is an investor, educator, and storyteller, illuminating one of the most overlooked and simple ways to grow your wealth.
Many of the brightest minds in the investing world share one common trait: they recommend dollar cost averaging as an investment strategy.
But what is dollar cost averaging and how does it work?
Here's Dollar Cost Averaging 101!
Dollar cost averaging, or "DCA" for short, is a simple investment strategy in which an investor splits the total amount to be invested in a given asset across regular periodic purchases.
The regular purchases occur regardless of price, volatility, or economic conditions. The goal is to remove the complexities of market timing from the process, allowing an investor to build their desired position without concern for external factors.
Its simplicity removes behavioral and psychological biases from the equation.
Let's look at an example. You split $10,000 into 20 pieces, $500 each. You could have done any number of pieces, but 20 felt right.
You decide on a weekly DCA, so every Monday, you buy $500 of $BTC, regardless of price. After 20 weeks, you have built your desired $10,000 cost basis position.
Alternatively, you may not have a specific position size in mind. You know you believe in the long-term story for $BTC, but you aren't sure about near-term movements.
You are confident it's going (much) higher eventually, but with likely volatile swings between now and then.
In this scenario, you may go with a "perpetual DCA" plan. Just buy a set amount every day, week, or month, with no position size in mind.
This is an excellent approach for high-conviction, long-term investments.
(Note: Perpetual DCA is the backbone of my personal strategy. Not investment advice. Markets are always subject to risk.)
For the vast majority of investors, dollar-cost averaging and compounding are the two concepts that should form the foundation of your long-term wealth creation strategy.
Dollar Cost Averaging + Compounding Interest = All You Need
Albert Einstein famously said, "Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it.”
It's easy. Anyone can do it.
For bitcoin or another cryptocurrency, Voyager allows you to execute daily, weekly, or monthly automated purchases, pays you compounding interest at the end of each month and currently offers up to 6.5% on Bitcoin.
There are many experts out there that seek to over-complicate things. As you all know, I am not one of them. In investing, as in life, keep it simple!
So that was Dollar-Cost Averaging 101! I hope you found it useful.
For more insight and information by Sahil Bloom, check out his Twitter page (@SahilBloom).