Dollar-Cost Averaging With Purpose
The Investor-Friendly Approach
For many new investors, dollar-cost averaging is a sound investment strategy. Once again, the core principle at work here is diversification. Investors choose to reduce risk by staggering their entries into the market. More experienced investors also make use of this strategy. However, as with any practice or discipline, there are always levels of execution. A set purchase every week, or month, tends to be the go-to approach for the majority of investors.
This is most likely the best approach for new investors who are perhaps not that familiar with financial markets. However, what about investors who have been in the Crypto space for years? Should they not be upping their game, to maximize their efforts? Many investors chose to continue dollar-cost averaging throughout 2022. This was extremely unwise, and yet many fail to see the basic logic that disqualifies this particular practice.
If you choose to dollar-cost average into a bear market, the result is quite simply, varying levels of loss. There is no scenario where you can reach the final stages of a downtrend and be in profit. However, dollar-cost averaging into a ranging or bullish market is a far superior option. This way, one can at least stand a chance of being in profit. This is a basic truth founded upon mathematical certainties. You cannot outsmart a mathematical law.
An approach that I suggested in 2022 was to continue dollar-cost averaging, but to rather allocate regular purchases to cash, or stablecoins. Deploying this capital at a later stage, once a bottom has been established, is a far more effective strategy. This is especially true of altcoins. Realistically speaking, alts only begin to appreciate once a bottom is in. Yes, you will always have a few star performers that buck the trend.
However, these are oftentimes newly launched projects that are entering the market, and often with cutting-edge technology to match. Kaspa is one such project that managed to rally 259X (25900%) since September last year. Imagine that, melting faces in the heart of a bear market. To be fair, September was the turning point in the market. During the final weeks of August, I had suggested that September would most likely be the best time to recommence accumulation.
I had been quite opposed to the idea of accumulation in 2022. However, by the time August arrived, a fair amount of confluence was evident, and in line with my prediction, which I had made earlier in the year, regarding a bottom in September. Dollar-cost averaging into the market at this point meant that investors would be entering an appreciating, or sideways market. This is when the DCA strategy works.
You Can’t Time The Market
Buying the dip that keeps dipping is simply a case of compounding losses. There’s nothing smart about it at all. The market is a tough environment. The clear, concise, and disciplined execution of strategic planning is at the heart of maximizing time in the market. One of the greatest deceptions is the following:
You can’t time the market.
What do you think traders do for a living? Correct, their profession revolves around this very aspect. What you now need to consider is that successful traders are successful because they can time the market. Every successful trade is a market participant who correctly timed the market. If you think something is impossible, you are unlikely to ever attempt it. However, some know otherwise.
Look at the vast number of professional traders out there who at one point in time worked for companies such as Goldman Sachs and others. They know the importance of developing this skill. It’s not that you are perfectly in tune with the market, but that you are in sync and can make reasonably good decisions, and subsequently, profitable trades.
Final Thoughts
No matter where you are in your investing or trading journey, there is always room for improvement. Those who embrace this reality and are making a conscious and dedicated decision and effort to improve their skills, improve over time. Those who buy into the “it’s impossible to time the market” narrative spend their lives gambling, as their investment decisions never extend beyond a guess.
Nobody gets it right all of the time. However, you can get it right most of the time. That’s it for this one. Catch you in the next one. All the best!
Disclaimer
First of all, I am not a financial advisor. All information provided on this website is strictly my own opinion and not financial advice. I do make use of affiliate links. Purchasing or interacting with any third-party company could result in me receiving a commission. In some instances, utilizing an affiliate link can also result in a bonus or discount.
This article was first published on Sapphire Crypto.