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Dollar-Cost Averaging: How to Start

By ProvidentMetals.com on October 7, 2013 Filed Under: Investing Tips

It’s easy to fall into the habit of “chasing lows” — constantly looking for the bottom in silver prices, waiting to increase your position only to wind up missing the low.  That kind of market-watching can be stressful, and with so many factors to consider, it isn’t the ideal way to effectively maximize profits.  Precious Metals can be volatile, and, let’s face it, we all want to moderate our risk when it comes to investing.

Dollar-cost averaging helps with that by evening out the peaks and valleys. Rather than hunting for the lowest possible prices, an investor using the dollar-cost averaging technique decides to spend a given amount at regular intervals, no matter what the price is.

For example, two investors might have $500 each to spend on silver.

Investor A decides to buy whenever prices seem low.
Investor B decides to use the dollar-cost averaging method, spending $100 a month.

Price per ounce

Investor A

Investor B (DCA)

Month 1

$20

25 oz.

5 oz.

Month 2

$50

0

2 oz.

Month 3

$40

0

2.5 oz.

Month 4

$10

0

10 oz.

Month 5

$5

0

20 oz.

Investor A put all his money in on the first month, so he ends up with 25 ounces bought for $20 each. He timed the market poorly and didn’t buy when it was actually the lowest price, so he missed out on some really low prices in months four and five.

Investor B bought $100 worth a month, and ends up with 39.5 ounces bought for an average of $25 each. He paid slightly more per ounce than Investor A, but because he spread his purchases over the highs and lows, he ended up with more silver overall.

Dollar-cost averaging is a great way to slow down impulse buys, take the emotion out of investing, and avoid some of the risks that come with purchasing a volatile investment. It’s a great long-term strategy for commodities like gold and silver.

Additionally, this strategy can insulate you from the psychological boom-and-bust the stock market can inflict. If you know you are buying a set dollar amount at a regular time, you don’t have to stress one way or another about gains or losses. Particularly because of the psychological phenomenon known as “loss aversion,” people feel more pain over losses than they do pleasure from gains.

A slow and steady approach will not only drive accumulation, but it can make a turbulent market a little easier to stomach.

Do you use the dollar-cost averaging method? What is your strategy?

Have you ever suffered from paralysis by analysis, and missed out on chance to add to your stack?

We appreciate your feedback. Leave us a comment below, or follow us on Facebook and Twitter today.

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Comments

  1. Tin Foil says

    December 31, 2013 at 3:12 pm

    We recently paid off a monthly note and had an increase in income, and we feel that a couple to three thousand in cash stored in the safe is more than enough so we put the rest in silver. We spend roughly the same amount on silver bi-monthly (as we get paid). I gotta have a little fun so I look at the spot price before I buy and may watch the live chart for a day or three but the purchase is made no matter what.

    Reply
  2. Gary says

    October 7, 2013 at 12:01 pm

    I get it. I do dollar cost average, however the example used is quite dramatic. I don’t think you would see a 45 dollar swing in a few yrs, let alone a few months.

    Reply
    • ProvidentMetals.com says

      October 7, 2013 at 12:59 pm

      Hi Gary. We certainly hope prices don’t swing that significantly, but wanted to make the numbers easy to understand. Thanks for your input!

      Reply

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