I wish I had learned about DCA when I was much younger. I am teaching my children about DCA now so that they can benefit from it in the future.
DCA stands for dollar cost averaging where you invest a certain amount of dollars into a stock over time. It is difficult to impossible to time the market over the long term.
A good way to invest is to buy the stock of good companies that you know where you use their products and see that they are growing. Many times in the past, I have seen a stock that I know and like but I think the price is too high. The stock may be at an all-time high, have been climbing recently, and seem like a crash is imminent. That causes me to delay buying the stock and staying in cash for longer. DCA helps to overcome this hurdle as it is hard to know if it is a good time to buy a stock. When investing for the long term, the way to overcome this fear is to buy some on a regular basis along the way.
For example, I have been a fan of Apple for a long time. Many times in the past I thought of buying it but it was touch to drop $5k at once on the stock because you keep wondering if it has had a long run, this can’t last forever, and a correction is coming soon. In the meantime, the $5k sits in cash and time goes by and the biggest loss is not being in the market at all.
DCA allows you to own stock as it goes up or as it corrects and then grows again. A good tool to look at is the DCA Calculator from BuyUpSide. For example, buying $500/mo of AAPL over the last 5 years would have taken an investment of $30k and turned it into $85k.
Apple may be an outlier as one of the best-performing stocks this century. This model can be done for other known companies that you know and use. Another example can be Nike – who we see on most sporting events, many star athletes, and worn by many people. The same $500/mo invested in NKE over the last 5 years would have resulted in $30k turning into $50k.
Or another example of Starbuck who many of us frequent or know of family, friends, and neighbors that go to it regularly. A regular $500/mo investment in SBUX would have been $30k turning into $43k.