Dollar-Cost Averaging: The All-Weather Investing Strategy for 2024 and Beyond
In the realm of investment strategies, dollar-cost averaging (DCA) emerges as a steadfast beacon for 2024 and beyond. Rooted in the wisdom of Benjamin Graham and later praised by Warren Buffett, DCA stands for an ultimate approach to bypass the complexities of market timing and emotional biases. Through disciplined weekly, monthly, or quarterly investments, one can navigate market volatility with ease, preserving capital in downturns while embracing growth opportunities in bull markets.
Even a small amount invested consistently can snowball into a significant sum over time.
While the strategy has been long-used in public markets, the private domain has hitherto demanded a substantial entry ticket, often starting at EUR 250’000, a million, or more, thereby limiting the utilization of DCA to the echelons of the ultra-wealthy. Luckily, Moonshot is changing the game by establishing DCA in the private domain, empowering investors to access previously out-of-reach opportunities with a minimal monthly commitment of just EUR 300. With Moonshot's innovative touch, the triumph of DCA in mitigating risk and maximizing returns becomes a beacon for investors seeking a disciplined and proven method for navigating the intricate landscape in both public and private realms.
Old, but gold: A Graham- and Buffett-tested investment approach
Over time, investors have explored various strategies, many of which, while effective, prove challenging for non-professionals to execute. Among the plethora of these, only one has stood the test of time, even garnering the endorsement of Warren Buffett, one of the world’s most successful long-term investors. Buffett, in turn, learned this strategy from Benjamin Graham, who was the first ever to describe it in his 1949 investment classic, The Intelligent Investor.
The strategy is dollar-cost averaging (DCA). DCA bypasses investment concepts such as value, growth, and market timing, replacing them all with a single approach: discipline. It involves investing set amounts at regular intervals, usually monthly or quarterly. In contrast to a large one-off investment, this method reduces the impact of both long-term market cycles and short-term volatility. When share prices drop, the periodic fixed investment acquires more shares, and less when they’re rising, thereby reducing average cost and preserving liquidity.
The best thing about DCA is that it neutralizes emotion and bias, above all. Indeed, if discipline is maintained, investors won’t be panicked into selling when prices drop. Instead, they will automatically seize the opportunity to accumulate more shares at lower prices.
Real-world Application of DCA: Swiss Stock Market Analysis
Simply put, DCA eliminates the need to time the market - an endeavor deemed “both impossible and stupid” by Buffett. The record supports this claim. Over the past 20 years, those trying to time purchases in Swiss equities could have missed the best days and ended nearly 78% worse off than if they had simply stayed invested*.
* The calculations were made using the SIX - Swiss Market Index (SMI) as the Swiss stock market.
In bear markets, DCA can significantly reduce losses or even eliminate them altogether. For instance, if investors committed a lump sum of EUR 20’000 to the Swiss market after it had already dropped by 20% - assuming it hit the bottom - during the Global Financial Crisis (2007-08), they would have lost nearly 22% after 20 months. However, had they invested EUR 1000 monthly over the same period, the loss would have been a mere 0.34%. Moreover, they would have picked up more stock at a lower average cost compared to a one-off EUR 20’000 investment.
In a bull market, such as the one which has prevailed in Switzerland from early 2000 to the current day, a single investment of EUR 20’000 in the SMI, at the beginning of any month over the period, carried a significant risk of losing over 20% of its initial value. The odds of experiencing a portfolio loss exceeding 20% gradually increase in line with the number of years one stays invested, reaching a peak of nearly 22% over 3 years, before notably diminishing to as little as 3.07% over 10 years.
That said, DCA significantly outperforms the lump-sum method, especially over the long term. The likelihood of experiencing the same percentage of loss in the total portfolio value is substantially lower across the board, whether it's over 1 year or 9. Committing a pre-set amount at regular intervals reduces the probability of losing more than one-fifth of the portfolio value by an average factor of 4.07.
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Exploring new frontiers in DCA: Private markets
Read the full article on our website to discover our comprehensive analysis of implementing dollar-cost averaging across both public and private markets.
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