Pros and Cons of Using DCA
As shown in the diagram above, DCA is predicated on the thinking that your average cost would be lower over the long-term for assets that consistently rise in value. In this case, SPY ETF shares you invested in averaged US$378.19 over the 28-month period, much lower than the US$412.07 on May 1, 2022.
Using DCA still requires you to practise self-discipline to shut out the outside noise, and stick to your investing schedule. Since you will be holding more cash for longer while waiting for the next interval, you must invest that money in other assets with high liquidity (ability to turn into cash) instead of spending it.
There are of course caveats to using DCA. For assets like the SPY ETF that tracks blue-chip assets and benchmark indexes that have been proven to perform well over the long-term, DCA is a good strategy.
However, using DCA is not advised for volatile assets like penny stocks (below US$1.00 per share) or companies that do not have strong economic fundamentals and thus may go bankrupt during a down cycle.
Alternatives to DCA
Two common alternative strategies to DCA are value averaging and lump sum investing. Unlike DCA, these strategies require a hands-on approach and yes, market timing.
Using value averaging, you would purchase less when a stock price is high and more when the price is low. While you could conceivably make more profits this way compared to DCA, you run the risk of not having enough to invest in this strategy when a market decline hits. DCA is superior in this sense because it simplifies matters for investors and you can plan ahead how much you are setting aside to invest in the coming months or years.
Based on the belief that a blue-chip asset would rise over time (like the S&P 500 Index, gold, technology stocks or property), you could also invest a lump sum upfront. This way, you would definitely make more money than DCA as you would be coming in at a much lower price from the outset. However, unless you’ve won the lottery or some other windfall, this is a less common strategy and in fact a stressful one, if a big part of your portfolio is parked in a single asset.
How Can I Get Started on DCA?
One of the DCA caveats is that it still involves some decision-making in terms of which asset you plan to commit your investments to over the long haul. For beginner investors unfamiliar with market movements and still wanting to diversify their portfolios, ETFs allow them to use DCA while investing in a broad selection of assets.
Robo-advisors can automate your DCA strategy by taking the emotion out of investing. An exciting new entrant in the Robo-advisor space is Kenanga Digital Investing’s artificial intelligence portfolio-building tool and Robo-investor KDI Invest.
KDI Invest constructs your portfolio using a combination of ETFs listed in the U.S. and that track a large variety of assets, including equities, bonds, real estate, industries, commodities and currencies.
As shown in the “How DCA Works” diagram, using a DCA strategy may mean buying fractional shares (slices of shares) instead of single shares or lots. Well, good news! KDI Invest is one of the few market brokers that automates fractional share investing, constructing a diversified portfolio for you without compromising on precision or cost.
When you open your KDI Invest account, you can immediately build your risk profile by selecting your return objective, risk tolerance, time horizon, and liquidity preferences. KDI Invest’s proprietary artificial intelligence (AI) algorithm then segregates investors’ portfolios into five general portfolios: Very Conservative, Conservative, Balanced, Growth and Aggressive Growth.
Unlike typical fund managers that may charge you brokerage fees per transaction and thus adversely eat into your DCA profits, KDI Invest does not charge fees for investments of RM3,000 and below. Beyond that, KDI Invest fees range from 0.3% to 0.7% per year, not per transaction. Visit www.digitalinvesting.com.my/invest to find out more.