Many investors find the concept of Dollar-Cost Averaging confusing, but it is a very useful and simple strategy for investing. Dollar-cost averaging is where an individual periodically invests a set amount of dollars or Rupees or any other currency into a fluctuating investment – typically a mutual fund or a stock or nowadays even cryptocurrencies.
In India, this strategy is popularly known as SIPs (Systematic Investment planning). Purchases are made automatically, regardless of how the market is performing at the time. This strategy allows an investor to get an average investment cost that is lower than the average price of the shares/tokens over a long period of time.
Even though setting up a SIP monthly with equal installments is useful there is no hard rule that it is the only way, if the market goes a bit too down and you expect it to recover, a top-up to the original investment can also be down to take advantage of the dip, in this way one can acquire more units of that asset.
Let’s say the Price of Bitcoin on the first date of months 1,2,3,4,5, and 6 are $40,0000, $45,000 $35,000 $30,000 $40,000, and $45,000 and you decide to start a SIP where you put an equal amount on the first day of every month your average price would be around $39,000 which would make you in a profit of $6000 per bitcoin despite the short-term dips.
This strategy is very useful for new investors who don’t have a large capital right now but can invest little amounts every month. It is also beneficial to them as they do not have to go through the stress of timing the market if a decision is made to invest a small amount every month, the volatility of the stock market can turn into a benefit instead of a risk. As a matter of fact, when the market is down, dollar-cost averaging investors are benefiting by getting more shares for the exact same amount of money they invested when the market was up.
People who are busy with their day-to-day lives can also use this strategy as it requires minimum time and effort from their side.
One main point that people need to make sure of before starting a SIP or dollar cost averaging is that they need to think about it for the long term (3 Years+) and continue to be disciplined and stay invested. Disciple and patience are really needed for this strategy to pay off.
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