At some point in every trader’s life, you come into some cash or have some ready to go, and you have your eye on a particular stock. Now begs the question – should I dump 100% of this cash into the stock, or string it out over a few trades (DCA).
There’s conflicting advice on this and for good reason – the decision is yours. You’ll need to read a few articles (including this one) to get the best idea of what you think is the best fit. My personal views are not to dump 100% of your allocation in one go.
Just to reiterate – this strategy suits my circumstance and you’ll need to consider yours to see if it a viable solution. On my eToro portfolio, I aim to have around the 5-6% allocation benchmark for each of my investments. This means within my total portfolio, there shouldn’t be one particular holding that makes up more than 6% of my portfolio. This is just a personal choice that I found works well for me. Instead of going all-in on the first opportunity, I’ll string out my investments. So, I would invest 1% of my equity (say once every 4 weeks) until I hit my 5-6% allocation. That means I would invest over 5-6 months.
But what about time in the market? Isn’t it better to have time in the market, than trying to time the market? At the front, yes, but if your time horizon is long, a few months isn’t going to impact it. Plus, you have skin in the game from your first investment, until your last.
Let’s look at some other reasons to support this.
Zero brokerage
With the rise of zero brokerage, it has become significantly easier to buy/sell as you no longer have to worry about the broker taking their cut each trade. Back in the day, if you have to pay X% per trade, then it could make sense to allocation all of your cash for the stock in one go. This would save you from paying for each trade.
Dollar-cost averaging (DCA)/periodic investing
The theory behind dollar-cost averaging (DCA) is to make smaller recurring investments. So, as an example, instead of buying $5000 worth of TSLA in one go, you go for $250 increments every two weeks (or whatever suits yours tyle). This would reduce the exposure to the market for good and bad fluctuations. Now, compare these scenarios. Would you rather have
- A large amount invested and the stock goes up
- A large amount invested and the stock goes down
- A smaller amount invest and the stock goes up, then you buy again in two weeks, then again, and again etc
- A smaller amount invest and the stock goes down, then you buy again in two weeks, then again and again…
DCA’ing aims to lower the average buy-in price for that stock. You get the benefits of picking up stocks cheaper if the price does drop. Plus also the benefit of already investing in the stock if the price does climb.
A key component here is to ride the fluctuations. As no one knows how a stock will perform week to week, month to month and year on year. Spreading out those investments can negate some of the bumps in the road. Mr Buffett is a pretty strong advocate for DCA as well – is it sound advice?
DCA Psychology
Imagine you just dumped all of your allocated amount in a trade, then the X happens. You might get what people refer to as Buyers Remorse. This normally occurs when the market tanks straight after but it can also happen if the market rises. Why didn’t I allocate more money? I’m missing out on more gains? Using a gradual approach to investing can offset this psychological occurrence. I know I sleep easier knowing that I don’t have everything riding on the one entry price. If I did I would have to watch the price like a hawk and it certainly isn’t good for your mental health.
Financial situation
Not everyone has excessive cash laying around. They might only have $200/month to invest so leveraging an increment investing strategy could be perfect. Instead of saving up all your money until you have $5k, you just invest $200 each month. This replicates the DCA strategy mentioned above.
Well, there you have it. I like the strategy of a little bit over time, rather than a large amount in little time. What about you? What strategy do you use?