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NYDIG
“The investor’s chief problem—and his worst enemy — is likely to be himself. In the end, how your investments behave is much less important than how you behave.” – BENJAMIN GRAHAM
How much do you trust yourself? Not when things are calm, but when your emotions are running high? Do you think you can keep an even-keel if your portfolio takes a 50% hit or if it suddenly jumps 100% in the span of a few months?
It's certainly worth asking yourself these questions and contemplating how you'd respond. But, if you're considering investing in bitcoin for the first time, know that such moments aren't abnormal. For example, in 2021 alone, bitcoin experienced a more than 50% drawdown and surges of more than 100%.
As Benjamin Graham said, when it comes to matters of money, you’re most likely to be your own worst enemy. How you handle adversity or triumph disproportionately influences your long-term financial future.
But beyond mentally preparing, there’s something else you can do to brace for turbulence.
Dollar-cost averaging (DCA) is an investment strategy that mitigates wild portfolio swings. Done correctly, it will help you stay the course when you're most likely to make rash decisions.
A DCA plan is when you invest a set amount of dollars at regular intervals. You might not have heard the term before, but if you have a 401k, you’re probably already using a DCA strategy. Like most Americans with a 401k, you probably allocate a set portion of each paycheck to your retirement account. Whether the market is up, down, or flat, you regularly invest in your future. If you do it for long enough, the times you bought at the lows will cancel out when you bought at the highs.
For almost everybody, a DCA strategy is the safest way to invest. Why? Because timing the market, any market, is nearly impossible. That's doubly true for bitcoin, where the median daily price change was 0.23% in 2021. That might not sound like a lot, but it's nearly twice what it was for the S&P 500 Index during the same period. That shows that trying to time bitcoin's price movement is much more complex than the stock market, which is already hard enough.
Sure, if you had a crystal ball and knew there'd never be a better time to buy than now, the only logical decision would be to invest everything you've got in one lump sum. But, of course, no one can be so certain.
No need to take our word for it. Many financial luminaries have already made the case for us:
“Thousands of experts study overbought indicators, head-and-shoulder patterns, put-call ratios, the Fed’s policy on money supply…and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack.” – PETER LYNCH
“The function of economic forecasting is to make astrology look respectable.” – JOHN KENNETH GALBRAITH
“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.” – JACK BOGLE
Ask yourself, if you invest in one fell swoop, will you have the resolve to stay the course? If you’re not sure, a DCA approach is worth considering.
As the saying goes, "time in the market beats timing the market." By creating a DCA plan and sticking to it, you're giving yourself the best chance to put that insight to work. A DCA plan takes the emotion out of investing and can help conquer every investor's worst enemy.
Pros:
- Removes the emotion from investing. You've got a plan, and you stick to it regardless of how the market moves. A dollar-cost averaging strategy keeps you from committing the fool's errand of trying to time the market.
- A DCA strategy could lower your cost basis over time.
- Your portfolio will be less sensitive to price fluctuations by buying at regular intervals.
Cons:
- While a DCA plan will make you less sensitive to downside moves, it also means potentially giving up some upside. Investing a lump sum at a market bottom will always be more profitable than a DCA strategy.
- Using a DCA approach could result in your paying more transaction fees over the long run.
