The Profit Sector
Member Login
No Result
View All Result
The Profit Sector
Member Login
The Profit Sector
No Result
View All Result

The Best Dollar Cost Averaging Strategy

How to Make Even More Money Over Time

Jimmy Mengel by Jimmy Mengel
December 26, 2022
in Featured Articles, Investment Strategies
0
dollar cost averaging

In This Article

You might also like

Bags of Cash: How the Rich Get Richer

The Investor's Guide to Investing in a Bear Market or Recession

2023 Stock Market Predictions: Profit Sector's Top Three Stocks

  1. Timing the Market
  2. What is Dollar Cost Averaging?
  3. How to Dollar Cost Average
  4. When to Break the Rules

“In the short run, the market is a voting machine. In the long run, it is a weighing machine.”

Benjamin Graham

Remember when you bought a stock at its lowest low and sold it at its highest high?

Oh, right. You don’t remember because it never happened.

That’s because nobody can time the market perfectly. I can’t. You can’t. Warren Buffett can’t. If anyone tells you they can, they likely have some beachfront property in Arizona to sell you as well.

The funny thing is you don’t even have to try timing the market. If you have the patience and fortitude to stick with a simple plan, you can do the next best thing, which is to never overpay for stocks or never worry about waiting around for a bottom. 

The key to this strategy is dollar-cost averaging. Instead of going all in on a stock in one fell swoop, dollar cost averaging allows you to buy a small amount of the stock over time. It’s more akin to playing a dozen hands of poker with small bets instead of pushing all your chips onto the table at one time. 

What is Dollar Cost Averaging? 

It’s really quite a simple strategy if you can keep your cool and ride out any storms. However, it does require a plan and the stomach to stick to it — especially if the markets continue to drop. That’s because the plan involves buying a fixed dollar amount of a particular stock, fund, or index on a regular schedule regardless of its price.

That is usually where most retail investors generally fail because, to a large extent, they have it all backward — they love buying the hype and selling the fear.

You have the power of patience. 

Dollar-cost averaging does make sense even though it often involves overcoming those same fears as stocks “go on sale.” The reason is simple: Using dollar-cost averaging, more shares are purchased when prices are low, and fewer shares are bought when prices are high. 

The result is that over time, the average cost of your shares will become smaller and smaller. Since dollar-cost averaging spreads out your stock purchases, it lessens the risk that you will buy them at the wrong time.

Instead, you arrive at an average price that typically reflects the true value of those shares. 

Here’s how it works in practice…

How to Dollar Cost Average

You have $10,000 that you want to invest in a tried-and-true blue chip stock that looks attractive. Let’s say, for example, that it traded for $50 a share on the day you decided to pull the trigger. 

Spending every penny of that $10,000 in one trade would carry a hefty risk along with it. If a bear market came rolling in, you would be at an immediate loss with nothing left to buy more shares. In short, you’d be stuck with 200 shares at $50.00 apiece. That is no way to safely grow your fortune.

You see, if you broke up that same purchase into four equal parts and scaled into your position during the downturn, your average price would be much lower. 

Here’s what I mean… 

Let’s say you broke up that $10,000 into four separate $2,500 purchases. Instead of buying them all at $50, you can break them into buys of $44, $51, $45, and $50. That way, you’d end up with 211 shares at $47.39 each. That’s the best of both worlds: more shares for less cost per share. 

That puts you in a far greater position when the market finally turns around. Better yet, you wouldn’t have to guess exactly where the bottom was along the way. And when the market turned — as it always does — you would be there to reap the benefits. 

When to Break the Rules

Some dollar cost averaging devotees will set a concrete buying schedule: “I’ll buy $100 worth of Home Depot (NYSE: HD) stock at the beginning of every month.” That is all well and good.

However, there are clear times when you can buy Home Depot stock at a much cheaper rate… 

Like right now, for instance. With rising interest rates and inflation cutting into the business, you would be better off putting more of your capital into it instead of a random monthly contribution. You’d lower your cost per share over the long haul. 

This is called “buying the dip,” and despite my warnings about timing the market, it can be useful for positions that you want to hold long term. That makes dollar cost averaging a nimble tool: you can tweak it to fit the current market without trying to time it exactly.   

But you can play the game between the lines while building a lifetime portfolio.

In the end, trying to time the bottom is a fool’s errand. Trying to time the top is when investors get greedy and try to ride a stock “to the moon.”

Instead, you should be wading in one step at a time, using dollar-cost averaging as your guide — especially as the market heads downward. I’d venture that you should be buying more when we hit new lows.

You can automatically dollar cost average by purchasing a dividend reinvestment program. These DRIPs will take your dividend payments and invest them back into the stock, regardless of how high or low its trading. When one of my major DRIP stocks takes a beating, I load up on stocks in the DRIP, knowing that eventually, the company will snap back, and I’ll have filled up my coffers at the lowest possible price. 

So, when you combine the efficiency of dollar-cost averaging with the “Rule of 72”, you unleash the power of a dividend investment portfolio.

Take a look at that Home Depot stock over the past ten years, assuming that you put the $10,000 into it over some time and enrolled in the DRIP:

home depot money invested with dividend reinvestment chart

That’s why set-it-and-forget-it stocks almost always outperform the market when you buy them the right way. If you really think a stock – like Home Depot – will be around for the next few decades, it behooves you to slowly build your positions in good times and bad. 

You can easily do this with index funds like the ProShares S&P 500 Aristocrats ETF (BATS: NOBL). They follow the market, so you don’t have to. 

Otherwise, find a fit for your finances and your risk tolerance. If you can drop $100 or more on a single stock every month, do so. If you happen to be flush with cash when one of your favorite stocks goes on sale, have at it.

Don’t overdo it in either direction – you don’t want to be pulled apart by horses. 

The one thing you should never do is sink or swim on one single stock. Wade into it. See how the water feels. Swim accordingly. Don’t sink.

Don’t be afraid of the word “average.” Your returns will be far from average if you stick to your guns and slowly allow your money to create itself.

Godspeed,

Jimmy Mengel
The Profit Sector

Related Posts

  • Safe Investing With Monopoly Utilities
  • Investing in Dividend Reinvestment Programs: How to Turn DRIPs into a Fountain of Riches
  • Dividend Aristocrats 2023 - Get the Full List Here (Plus: The Easiest Way to Invest)
Tags: DividendsDollar Cost AveragingDRIPsETFsHome DepotNYSE: HD
Jimmy Mengel

Jimmy Mengel

I’ve had a long road as an investor, researcher, and writer of all things investing.  I began investing when I was 8 years old: I started with a small collection of baseball cards and quickly learned the art of buying low and selling high.  By the time I was 12, through forward-thinking investment in rookie cards for players that turned into superstars and countless trades with my buddies, I had amassed a treasure of cards that were worth thousands of dollars then – and tens of thousands today. I learned several things about investing through my card collection: buy value, avoid hype and know your timeline.  My dad, a financial analyst then, even invited me to present my strategies to his office colleagues. It was then that I began turning those lessons into my own stock market portfolio.  The companies I bought back then, like Disney, General Electric, and Coca-Cola, allowed me to build up enough wealth to buy my first car. I discovered the power of dividends, the magic of compound interest, and the sanctity of safety. The lessons I learned then still stick with me today. I wanted to continue sharing my story with others, so I began working my way into financial journalism, which I’ve done for over a decade. I’ve had the privilege of helping hundreds of thousands of readers achieve financial independence. I've brought my readers closed annual portfolios of 79%, 70%, 76%, and a historic 382% over the last four years alone. Several of the stocks I uncovered ended up becoming life-changing quadruple-digit gains. In the process, I’ve traveled the globe from Africa to Colombia to Transylvania, meeting with CEOs, CFOs, and CTOs in different market sectors. I’ve also toured with presidential candidates, grilled influential congressmen, and interviewed pop-culture business icons. I’ve been a keynote speaker at some of the largest investment conferences in the U.S. I go the distance and put my boots on the ground so you’ll have all the tools you need to succeed in any market. I couldn’t be more excited to bring the same research, enthusiasm, and results to The Profit Sector, where I’ll break down the market for you weekly. Read my bio and access my full free archive here. 

Recommended For You

Bags of Cash: How the Rich Get Richer

by Jimmy Mengel
January 31, 2023
0
Bags of Cash: How the Rich Get Richer

Why investing in luxury goods is a smart move in today's market...

Read more

The Investor’s Guide to Investing in a Bear Market or Recession

by Adam English
January 21, 2023
0
stock market bull vs bear digital style

A bear market looms and the threat of recession is global. Investors need to know what to expect. Here it is...

Read more

2023 Stock Market Predictions: Profit Sector’s Top Three Stocks

by Jimmy Mengel
January 12, 2023
0
Close-up of a fortune teller reading tarot cards on a table with purple tablecloth

Our analysts weigh in on the top stocks and trends emerging for the new year...

Read more

Investing in InMode Ltd. (NASDAQ: INMD): Give Your Portfolio a Facelift

by Jimmy Mengel
December 30, 2022
0
Bearded mustached dark-haired man dozing during a non-invasive face-lift procedure

The "Zoom Effect" is driving huge new growth in cosmetic surgeries. Here's the best way to play it...

Read more

How to Give Your Money Away

by Jimmy Mengel
December 24, 2022
0
The woman is holding a red heart.

While we're always finding you ways to make money, sometimes it's best to give it away.

Read more
Next Post
man with tablet

Lockdown Lunacy: The Winners and Losers of the Pandemic

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Recent Posts

Digital stock market falling graph and blurry coronavirus. Concept of stock market crash due to covid 19 coronavirus pandemic. 3d rendering toned image double exposure

How to Find Stocks That Go Up Alongside Rising Interest Rates

January 31, 2023

Get My #1 Stock to Buy Right Now

January 30, 2023
Legendary Investor: “More Losses to Come”

Legendary Investor: “More Losses to Come”

January 28, 2023
3 New Dividend Aristocrats Are Crowned

3 New Dividend Aristocrats Are Crowned

January 28, 2023
  • Home
  • Member Login
  • What is The Profit Sector?
  • Meet Our Team
  • Join The Profit Sector Monthly
  • FAQs
  • Featured Articles
  • Dividends and Income
  • Analysis
  • Investment Strategies
  • Saturday Digest
  • Terms and Conditions
  • Privacy Policy for The Profit Sector
Contact Us

Protected by copyright laws of the United States and international treaties. This website may only be used pursuant to the Terms and Conditions and any reproduction, copying, or redistribution (electronic or otherwise, including on the World Wide Web), in whole or in part, is strictly prohibited without the express written permission of The Profit Sector, LLC. 415 1st Ave N #19868, Seattle, WA 98109

© 2022 The Profit Sector, LLC. All rights reserved. Our website provides stock market research, commentary, and analysis. Information is provided “as is” and solely for information purposes, not for trading purposes or advice.

Nothing on this website should be considered personalized financial advice. Any investments recommended herein should be made only after consulting with your personal investment advisor and only after performing your own research and due diligence, including reviewing the prospectus or financial statements of the issuer of any security. The Profit Sector, its managers, its employees, affiliates and assigns (collectively "The Company") do not make any guarantee or warranty about the advice provided on this website or what is otherwise advertised above. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. The Company is not affiliated with, nor does it receive compensation from, any specific security. To the maximum extent permitted by law, the Company disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations provided herein prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

No Result
View All Result
  • Home
  • Member Login
  • What is The Profit Sector?
  • Meet Our Team
  • Saturday Digest
  • Frequently Asked Questions
  • Privacy Policy for The Profit Sector
  • Terms and Conditions

Protected by copyright laws of the United States and international treaties. This website may only be used pursuant to the Terms and Conditions and any reproduction, copying, or redistribution (electronic or otherwise, including on the World Wide Web), in whole or in part, is strictly prohibited without the express written permission of The Profit Sector, LLC. 415 1st Ave N #19868, Seattle, WA 98109

© 2022 The Profit Sector, LLC. All rights reserved. Our website provides stock market research, commentary, and analysis. Information is provided “as is” and solely for information purposes, not for trading purposes or advice.

Nothing on this website should be considered personalized financial advice. Any investments recommended herein should be made only after consulting with your personal investment advisor and only after performing your own research and due diligence, including reviewing the prospectus or financial statements of the issuer of any security. The Profit Sector, its managers, its employees, affiliates and assigns (collectively "The Company") do not make any guarantee or warranty about the advice provided on this website or what is otherwise advertised above. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. The Company is not affiliated with, nor does it receive compensation from, any specific security. To the maximum extent permitted by law, the Company disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations provided herein prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In

Add New Playlist