say 1 unit of a product costs 10 bucks. you buy 1.your price per piece is 10 bucks.the product loses its value, drops down to 5 bucks.you now have a loss: -5 bucks.but if you buy one more piece at the new price , you own 2 pieces, with the combined price of 15 bucks.so your price per piece has gone down from 10 to 7.5, because 15/2 = 7.5!say the price drops again from 5 to 3.since your price per piece is 7.5, from 7.5 to 3 is a loss of: -4.5 (per piece).you repeat the process. this time around, you buy 2 pieces at 3.10 + 5 + 3*2 = 2121/4 = 5.25so your new price per piece which you have effectively paid, is 5.25, you have minimized your loss again, it is no longer a deficit of 4.5 (per piece), but from 5.25 down to 3, a deficit of 2.25!the same also works upwards. reset the example, starting out with buying one piece for the price of 10 bucks.the price jumps to 15 per piece. you have made a gain of +5.if you buy one more piece at the new price, you have 10+15 = 25 for 2 pieces, i.e. your price for one piece has averaged to 12.5, which has reduced your net gain to 2.5 (per piece)!dollar cost averaging basically approximates & pushes your price per piece towards the current value of the product. it sort of negates losses & wins, it chases after the current value, but slightly lags behind!you are basically optimizing away short term gains & losses and instead, are betting on long-term market trend...historically, global stock markets and economic productivity have continuously trended upward over long-term, multi-decade horizons! and a well diversified, low cost index fund captures that trend:things go up. society progresses. we do not devolve.. technology gets better and better (until the aliens reset us, but thats another story).thus, fundamentally speaking, via the DCA put into the entire market, you have a guaranteed way of growing your wealth. no need to speculate.
>>62510590That's not Dollar Cost Averaging. DCA is when you spend the exact same amount of dollars each time you buy. So in your example, you would buy 2 units at $5 each, not 1. If it goes up to $20, you buy 0 5 units. It just helps you avoid buying too much during a temporary upswing and buying too little in a temporary downswing.
>>62510638And in case it wasn't already understood, DCA assumes you are buying on a regular basis (i.e. once every paycheck). The whole point is to not try to time the market and to minimize susceptibility to outsized market swings.
>>62510638might have mixed up the labels, no idea what this is called... i blame my double digit IQ
>>62510590very helpful thank you even if it isn't proper dca but this guy >>62510638also explains it pretty well so I think I know what it is now. thank you everybody
>>62510590If you had an even higher IQ you would just time the bottom. No shame in being a midwit though.
>>62510680yeah, my example lacked fixing the amount you spend periodically (thats how i do it anyway, so i do real DCA, just the explanation of the mechanism was double digit IQ level and thus flawed).but i think the conclusion is still correct.lets repeat the example (for learning purposes, i learn when i type).i got 10 bucks and invest that periodically.i get 1 piece for 10. avg price per piece = 10price drops to 5, so i get 2 more in the next period by investing 10 bucks again.i now have 3 piece for a total price of 10 + 5 + 5 = 20 and avg. price per piece = 20 / 3 = 6.6'.with the current price being 5 and my avg. price per piece being 6.6', my loss is -1.6' per piece.prior it was -5. so the loss (per piece) was lowered from -5 to -1.6'.conclusion: my losses were minimized.price goes to the moon, 20. i can only afford half a piece for 10 bucks in the next period.i now have 3.5 pieces for a total price of 10 + 5 + 5 + 10 = 30 and avg. price per piece = 30 / 3.5 = ~8.6.before buying half a piece, my avg. price per piece was 6.6', and a piece is worth 20 now, so gains by +13.3'.after DCA buying that half piece, my new price per piece being 8.6, im only up +11.3 per piece.so i went down from 13.3' to 11.3.conclusion: my gains were minimized.so in both instances, my losses and gains are being reduced. i am trending towards the current value (unga bunga)?!so the initial conclusion still holds true. gains and losses are sort of optimized away. thus short term fluctuations don't matter anymore, no need to worry about buying low and selling high...
Line won't go up forever, doesn't matter one bit that it did for the past 100, means nothing.
