Consistency is Key: Unlocking the Benefits of Dollar Cost Averaging

A Look at the Markets - September’s Performance

Let’s look at how an all-world ETF and Bitcoin have performed in September.

Although it was a volatile month, we can see that the Vanguard FTSE All-World ETF has increased by about 1.35% in September. Undoubtedly, the FED’s decision to cut interest rates by 0.5% helped the ETF recover from the drawdown earlier in the month.

Bitcoin also dropped at the beginning of the month but recovered to show an increase of around 7.4% during September.

Please note that Bitcoin has dropped this week due to the tensions in the Middle East. This will be reflected in October’s performance charts.

Consistency is Key: Unlocking the Benefits of Dollar Cost Averaging

This week, we focus on a vital investment strategy known as Dollar Cost Averaging (DCA). This method allows investors to contribute consistently to their portfolios, regardless of market volatility or price, thus helping to alleviate the stress of deciding when to invest.

What is Dollar Cost Averaging?

Dollar Cost Averaging involves investing a predetermined amount of money at regular intervals—such as monthly or quarterly—without regard to the asset's current price. This approach simplifies your investment process by focusing solely on how much to invest rather than trying to time the market.

The Concept Behind Dollar Cost Averaging

The term "Dollar Cost Averaging" was popularized by Benjamin Graham in his influential book, The Intelligent Investor. Graham's insights highlighted how this strategy can help investors navigate the unpredictable nature of market prices. Although he referenced the US dollar, the principles of DCA apply universally across different currencies. Even if you invest in Euros the technique is still referred to as "Dollar Cost Averaging".

Benefits of Dollar Cost Averaging

One of the key advantages of DCA is that it helps manage investment risk. By investing consistently over time, you are likely to purchase more shares when prices are low and fewer shares when prices are high. This averaging effect can lower your overall cost per share and reduce the emotional stress associated with market fluctuations.

• Mitigates Market Timing Risks: DCA minimizes the risk of making poor investment decisions based on short-term market movements. Instead of trying to predict market highs and lows, you invest steadily over time.

• Encourages Discipline: Committing to a regular investment schedule fosters a disciplined approach to investing, which can be particularly beneficial for new investors who may not have large sums available for lump-sum investments.

• Reduces Emotional Impact: By adhering to a fixed investment plan, you can avoid the emotional pitfalls that often lead to impulsive buying or selling during market swings.

Considerations When Using Dollar Cost Averaging

While DCA offers numerous benefits, it is essential to recognize its limitations. If the market rises steadily over time, you may miss out on potential gains compared to a lump-sum investment made at the outset. Additionally, funds allocated for future investments may remain in low-yield cash equivalents while waiting to be deployed. Investors should also ensure that their choice of assets aligns with their long-term financial goals. DCA does not replace the need for thorough research into potential investments; it merely provides a structured approach to building your portfolio over time.

In summary, Dollar Cost Averaging is an effective strategy for long-term investors looking to build wealth steadily and systematically. By committing to regular investments, you can navigate market volatility with greater confidence and discipline, ultimately enhancing your chances for success in achieving your financial goals.

Tensions in the Middle East

This week, rising tensions in the Middle East have unsettled global markets, with renewed conflict between Israel and Hamas raising concerns about the potential involvement of Iran and Hezbollah. Given Iran's historical support for both groups, investors are worried that the conflict could escalate, further destabilizing the region. This uncertainty has driven oil prices higher due to fears of supply disruptions from this critical area for global energy.

In response to this volatility, investors are gravitating toward safer assets such as gold and government bonds, while stock markets in Europe and the U.S. have remained quite stable. The price of oil has increased by about 6.8% this week.

You might have expected the increased tensions to have a bigger effect on the stock market. One possible explanation is that the indices contain oil companies which benefit from a rising oil price.

Bitcoin has been a loser this week wiping out the September gains. However, high volatility in cryptocurrencies is to be expected.

The Van Gogh Approach: Mastering Skills by Doing

I love this quote because it resonates deeply with my own life. It highlights not just the importance of learning, but of learning by doing.

When I started my first business in the 1990s, I had to learn how to run a business in real-time. You can read all the business books in the world in preparation, but the most valuable lessons come from actual experience.

The same was true when I moved to Italy in 2013 and began learning how to teach Business English. Although I completed a teaching course, the best way to learn was by applying what I had learned in the classroom.

One challenge with the Italian school system when teaching English is that it often emphasises theory without sufficient practical application. Would you learn how to swim or drive a car this way?

This principle holds true for investing as well. The best way to learn is to start small and invest regular, manageable amounts of money (see Dollar Cost Averaging above). Don’t be frightened to make mistakes. Remember that doing nothing is as risky as doing something.

We have a lot to thank Vincent Van Gogh for.

Word of the Day - Gravitate

Gravitate - verb - to be attracted to or move towards something