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Dollar Cost Averaging vs Lump Sum Investing
Once you decide on your risk level comfort zone, then you’ll need to decide how to enter the market. In this section I’ll introduce the two most common strategies Dollar Cost Averaging (DCA)and Lump Sum Investing. Then, I’ll introduce you to Variable Dollar Cost Averaging which is a more modern approach to DCA investing and in my opinion a better choice for crypto investing.
Dollar Cost Averaging
Dollar cost averaging refers to the practice of systematically investing equal amounts, spaced out over regular intervals, regardless of price. Dollar-cost averaging aims to avoid making the mistake of making one lump-sum investment that is poorly timed. Dollar cost averaging is considered a low-risk option for buying into crypto.
I like dollar cost averaging (DCA) however if done traditionally it’s too rigid and methodical for my taste. Say you want to invest $12,000 total, with DCA you might divide that into $1,000 monthly crypto investments regardless of whether the market is up or down. As volatile as crypto is, that sounds like high risk not low risk to me.
Variable Dollar Cost Averaging
Variable Dollar-cost averaging is a variation on DCA that I recommend. I call it variable DCA because the amount varies based on your available capital or budget. First decide how much you can spend at any particular time (money you can afford to lose). For low income investors this may be $100-$200 at a time. For moderate income investors this might be between $200-$400 at a time. For higher income investors this may be $500-$1,000 at a time.
Second watch the market for a dip in prices. At least a 10% dip is a good place to start. More is better. This topic will be covered in more detail in the course on investing.
Here’s another variation on variable DCA. If you have $2,000 you want to invest now, but don’t know when is the right time to buy, consider this. Divide your capital into chunks based on whether you’re a low, medium, or high income investor. For a high income investor, divide $2,000 into 4 chunks of $500. Pick what you think is a good time to make your first purchase and spend $500. If the market goes down a little more in a day or two then spend another $500. The idea is to not invest it all at once so that if the market dips you still have some capital available to buy some of your favorite crypto at a lower price.
Here’s an introduction video to basic dollar cost averaging created by Coinbase.
Lump Sum Investing
Lump sum investing is where you take all your available cash and invest it immediately without varying the amount. The goal is to try and time market bottoms and buy at the lowest price possible. This is more difficult than it sounds, hence this option is for more experienced investors who believe they can time the market to achieve high gains. Lump sum investing can be very high risk, but if you get it right the rewards can be truly life changing. On the other hand if you get it wrong, the impact to your finances, and ultimately your life, can be devas ting.
PLEASE, DON’T MAKE THIS MISTAKE! Keep reading.
Two years ago in 2019, when I still had my local Meetup group on investing in crypto, I met an older retired woman that got involved with crypto back in 2017. In late 2017 crypto had a major bull run that sent the price of bitcoin soaring from $1,000 to $20,000. Being an in-experienced investor this older woman got caught-up in the FOMO (fear of missing out) and took out ALL her retirement money and bought several different cryptocurrencies while they were at all-time highs. She shared with me that her children begged her not to do it. Her portfolio was down 6 figures when I met her. I don’t know if her portfolio and ultimately her retirement, ever recovered.
The Bottom Line
Conventional wisdom always tells us “buy low, sell high”, but emotions aren’t logical or rational. For some investors, the first time their investments take a nosedive, fear might make them a bit crazy. Without an awareness of themselves and their goals, they might be tempted to sell low. On the other side, when markets are doing great and irrational exuberance sets in, some people will be tempted to chase a crypto and buy high.
Your feelings about the ups and downs of the market are probably the most important factor when determining risk tolerance and your potential for success. This isn’t about what you can afford financially, it’s about your disposition and how you make choices when there’s uncertainty and risk around your money.
Once you know your risk tolerance and have a plan for how you’ll handle it, then you can decide on your risk capacity and determine how much to spend. Unfortunately, most people new to crypto start with the money first, make mistakes, then try to figure out how to manage their fear.
End Chapter
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