What exactly is DCA and why you should/should not use DCA to build your portfolio? In this article , we will be learning some fundamentals of arriving at a balanced portfolio through experiments.
Lets start by asking ourselves “ Am I a trader or am I an investor ?”.Let me explain it further for you. A trader is someone who wishes to profit from short term investments. Short term can vary from hours to years , while ulterior motive is to make profit , book profits and leave the investment. An investor is someone who sees his/her investments as assets with inherent value. Though he/she intends to make profits , but rather by holding them for an extended period of time. The investment work work as a hedge here , rather than a source of income.
The second question you should be asking yourself is “ What is my financial capacity and risk tolerance ?”. It is viewed by many experts that young people tend to take more risks than their older counterparts , but the aspect that you are investing in crypto should itself account for the risk rate you are willing to rate . Higher the leverage , higher the risk , higher the chances that you lose everything you put in. Well , are you prepared to lose 100% of your wealth gambling on a volatile asset? if the answer is no, you should start pay attention to what you are doing in crypto world. I am not saying that you might lose everything, but whenever fear and greed kicks in , you tend to make some irrational decisions which could later be sources of regret. Always remember that Market is not a rocket, it will keep on giving opportunities for you in longer timeframes. If your investment is optimum and you are willing to take optimum risk , your profit will also be optimum. This rate of ‘optimum’ can vary according to your age , fiscal capacity , taxation system etc. It would not be wise to borrow money , which you can end up not repaying without the investment being a successful one.
Third question is all about How and when to invest? , I am leaving the question of where to invest to you and your qualified financial advisor. DCA is the answer to ‘how and when’. Lets first take up ‘how’. There seems to be 3 prominent methods of investment. One:- Go all in and wait for miracles ; Two:- Buy in parts at fixed intervals , which works great for investors ; Three :- Buy the dip , nowadays the common narrative is to buy the discount! When dips within a dip happens , buy that too. This is often a strategy without the strategy. People who are driven by greed, fomo in and buy the top. They are buying the trend. Trend is your friend, till it ends, is a mantra forgotten by many. Definitely not a sustainable way of investment, but lets not forget that these investors are respecting the trend. While buy the dip type of investors often do not realize that they are neglecting the trend. If somebody knows that the price of a commodity is going down, why would he/she buy the same commodity overpriced than a future low.
Long story short, DCA works well only coupled with ‘how and when’ to do that, though it should be noted that extensive DCA is an investment blunder. Lets do a thought experiment here. Imagine that you have an initial investment of $100. Market turns bearish and Portfolio becomes $90 and you put in another $100, as the ‘smart’ investor in you awakens. This continue till you empty your pockets or market turns bullish again. If you executed 9 buy orders each of $100, when market recovers the level before the dip, your portfolio will have a value of $1450 on an investment of total $1000. Impressive gains right!
Now consider another scenario, you buy only when market shows sign of recovery or change in trend. An excessive study of charts, shows me that this trend reversal can be fake-outs or fake reversals and a 2–3 fake-outs occur in each trend. So instead of buying 9 times you can opt to buy 2–3 times with a higher investment. Lets say these occur when your portfolio is $80,$50 and $20. When market recovers you will have a portfolio of same $1450 of an investment of $1000.
In a bull market both strategies yield the same profit and in a bear market the second strategy can give you better profits and peace of mind. If you combine a little Technical Analysis , Market Sentiment and a clear understanding of pre established resistances and support, you may not fall for all the fake-outs. So do DCA when and where necessary and keep the demons(Fear & Greed) at bay.