Recurring purchases and dollar cost averaging
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 6 min
In short
Dollar cost averaging means buying a fixed amount at regular intervals so that your average entry price is smoothed. It removes the need to time purchases, but it does not prevent losses when prices keep falling. Nothing here recommends a particular amount, frequency or asset.
Key points
- A fixed amount buys less when prices are high and more when they are low
- It removes the timing decision, which cuts emotionally driven trading
- If prices keep falling, averaging in still loses money
- Fees and record-keeping effort scale with the number of purchases
Definition
Buying a fixed amount of money's worth at regular intervals. What is held constant is the amount spent, not the quantity bought.
The mechanism is simple. Spend the same amount each month and you receive a smaller quantity when prices are high and a larger one when they are low, so your average cost tends to sit below the average price over the period. Its chief benefit against a lump sum is avoiding the case where everything went in on an unusually expensive day.
The real advantage, though, is behavioural. With no decision to make about whether to buy today, you do less of the buying-in-excitement and selling-in-fear round trip. Most exchanges offer automated recurring purchases, and once configured there is no room for a judgement call. That absence of judgement is precisely why the approach is popular.
Its limits are equally clear. First, if prices fall throughout the period, a smoothed average cost is still a loss — this is not a loss-prevention technique. Second, for an asset that rose over the long run, a lump sum invested early would have done better in hindsight. Which will be true is not knowable in advance.
Check the costs too. Each purchase carries a fee or spread, so a higher frequency accumulates more expense. Each purchase also creates a cost-basis record that feeds into the gain or loss when you sell; more purchases means more to reconcile at tax time, which is easy to overlook. What amount, how often and into what are decisions for your own circumstances — this site recommends no particular setting.
Watch out for
- · This is not investment advice and recommends no particular amount, frequency or asset
- · Dollar cost averaging does not prevent losses
- · More purchases mean more fees and more work at tax time
Frequently asked questions
Should I stop my recurring buys if the price drops?
That depends on your finances and your objective. Note only that stopping because prices fell means skipping the cheaper purchases, which runs against the premise of the method. This site recommends no particular course.