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Financial Jiu Jitsu will teach you how to gain leverage in the real world, step by step, until you are confident you no longer need more.

These peak markets are great for humans who utilize dollar cost averaging!

These peak markets are great for humans who utilize dollar cost averaging!

Hi there! Now that the stock market is near record highs I bet your dollar cost averaging scheme is churning extra money into your pocket. Wait, say what? What is dollar cost averaging anyways (DCA)? How would this give me more money during a peak market than during a stagnant or low market?

I am glad you asked that. DCA is defined as follows by Investopedia when you type it into a google search:

"Dollar-cost averaging (DCA) is an investment technique of buying a fixed dollaramount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high."

dollar_cost_averaging_definition

What this boils down to is actually pretty simple. If you invest in the market, you invest more when the market returns are negative. And the opposite occurs as well: you invest less (or none) when the market moves up. 

For example take a very concise version of this concept below:

Your target investing allocation is 200$ a month. If the market loses value in a particular month, you invest up to 400$, and if the market moves positive you can invest as little as 0$. Here is a graph portraying this very thing:

DCA_monthly_yield

DCA_monthly_yield

During any given month, this small of a window of input between 1% and -1% will hopefully have you contributing the max/min pretty often as opposed to anything in between. For instance, this month would yield 4x your minimum market movement which would eliminate your investment entirely:

djia_dca_fjj

This month the DJIA went up about 4.3% so if you are running a DCA scheme against any major index, (it doesn't have to be the Dow Jones) then you will likely be inputting very little if anything into your account. You will in essence be "saving" that money for a month where the market stagnates, or better yet, declines a bunch!

The title of the article was meant to imply that this would be a very good month for people who use Dollar Cost Averaging, because they really will be contributing their minimum into any investment account, and that means more cash on hand! The key to this gift horse is not to look it in the mouth so to speak. Technically any money you don't spend should be invested in other places or at least saved so that if the market decides to decline for a few months, you will be able to pay up with ease and gain some extra percentage points. 

The fun part of DCA is that no matter what happens, you win! When the market is crashing you get to invest more. When the market is booming you get to make money on paper and in your pocket. 

Every human being already incorporates a system like this but it functions in reverse. Usually when you end up with extra money, the natural response is to blow it on something fun. You have to fight mother nature on this one and realize that saving is the most fun thing in the world! Ok so maybe it's not, but you can always fantasize about blowing all the cash later but in larger chunks which is feasible. Pay off your student debt, pay off your house, quit your job, fly to the moon. The sky really is the limit and I hope you make it there! Thanks Dow ur a pal.

DDave
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