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?
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