Dollar Cost Averaging (DCA) is an investment strategy, where the goal is to minimize the impact of volatility when investing or when trading. Volatility means the increase or decrease in prices over a certain period. So, if someone says “high volatility”, it means that the increase or decrease in price is very fast changing from high to low and or vice versa.
This Dollar Cost Averaging (DCA) is a strategy to minimize the risk of volatility by trying to lower the overall average investment cost. DCA is done by dividing the purchase of the investment instrument you choose with a smaller amount on a regular basis, or at the time interval that you have specified. For example, assume you have a capital of Rp. 2.000.000,- to buy Bitcoin. You don’t buy Bitcoin with all of that capital directly, but in installments of lower amounts on a regular basis, don’t need a lot, but be consistent. Let’s just say you buy Bitcoin worth Rp. 200,000, – every month, meaning that you will regularly buy Bitcoin for the next ten months.
The benefits of DCA are also numerous, some of which are:
1. Risk Reduction Benefits
DCA avoids the disadvantages of lump-sum investments. Lump-sum is the opposite of DCA, where you immediately buy a large amount at once. If there is a prolonged decline in prices, it can reduce your overall portfolio, when you use a lump-sum strategy. On the other hand, DCA can reduce feelings of regret if something similar happens. A declining market is often seen as a buying opportunity. Because of this, DCA can significantly increase the long-term portfolio return potential, when market prices start to rise
2. Lower Cost
Buying when the market price drops, ensures that you can get a higher return on value. On the other hand, using a DCA strategy means ensuring that you buy more securities when prices are down than you are buying when prices are high.
3. Benefits of Saving Discipline.
The strategy of adding money regularly to investment instruments allows disciplined savings. Use cold money, not kitchen money.
4. Manage Emotional Investments.
The phenomenon of emotional investing caused by a variety of factors, such as making large lump-sum investments and avoiding losses, is not uncommon in behavioral theory. To that end, the use of DCA eliminates or reduces emotional investment.
A disciplined buying strategy through DCA makes investors focus their energies on the task at hand, and dispels news and hype information from various media, about short-term investment performance and direction.