Supercharge The "Dollar-Cost Average" Strategy
Food for thought: A Simple Strategy To Grow Your Money
The “Dollar Cost Averaging” strategy in investing is simple yet underrated at times.
Source: Wealth Academy
The strategy is not to time the market but to invest a fixed amount of money at regular intervals regardless of the price of the asset. So, when prices are higher we buy fewer units, when prices are lower, we get to buy more units.
The assumption when using this strategy is that the asset’s price increases in the long term even though it may decrease in the short run.
Let’s apply this to the stock market. The US stock market.
We know that recently stock prices have been fluctuating and it’s been hard to know where prices are heading next. Is the market going higher or lower?
Source: Tradingview
However, if we know historically that an asset has shown a long-term track record of increasing in price, we have more certainty it would remain so.
The S&P 500 index (basically a basket of the best 500 stocks in the US stock market) has this track record. Here’s its performance over the last 90 years which did see many bad times like world wars, the Dot Com Bubble and the Great Depression.
Source: MacroTrend
We know for sure that over the long run, it has only gone up. Warren Buffett himself called an S&P 500 index fund “the best thing” for most people who want to invest.
How does dollar cost averaging look like with the S&P 500? Let’s see.
In the past 15 years (2007-2021), we’ve seen 2 major crises that have caused a major crash in the stock market. They are the Global Financial Crisis and the Covid-19 pandemic.
If you had started dollar-cost averaging in January 2007, investing $2,000 every subsequent January (ie. buying more shares at 1-year intervals regardless of price), you would have invested a total of $30,000 over the past 15 years. You would have bought 179 shares (ticker symbol: SPY). And your present portfolio would be $75,538. Not bad, right?
Supercharge The “Dollar-Cost Average” Strategy Returns
Now, if we used options to capitalize on the S&P 500’s long term price performance, it gets even better. For the same total invested capital of $30,000 in 15 years and buying long-term call options at 1-year intervals (ie. every January) regardless of S&P 500’s price. Your present portfolio would be $367,328!
Pretty amazing returns without having to consistently monitor the market I would say.
I actually learned of this strategy in this Youtube video.
What are the risks?
Because options give you leverage (an option contract controls 100 shares) which means your profits/losses are amplified. Because the S&P 500 doesn’t go up in a straight line, there will be years where you will make losses. But, over the long run, because the S&P 500 has proven to increase in price, your profits will outweigh the losses tremendously.
So, applying this strategy or just simply investing should be done with money you don’t currently need. The longer the time horizon for investing that you have, the better the outcome. Time in the market beats timing the market.
Here’s the link to download the excel sheet.
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