Dollar-cost averaging is a simple long-term investment strategy that is approachable to those of us who may be still learning the basics of investing. The concept is that an individual will invest small fixed amounts into an investment or fund recurrently. For example, you may invest a fixed amount into a Roth IRA each month. So simple!
This strategy really takes the guesswork out of an investment. No need to assess market conditions or share prices—simply commit the same amount of money on a regular schedule to a particular investment. It is a reachable approach for those of us who don’t have thousands of dollars in the bank waiting to be invested on the occasion of favorable market conditions. Dollar-cost averaging is more about routine than judgment, minimizing the risk associated with emotionally driven investment decisions.
The market is generally fickle, and nobody can predict what it will do in the short term. It ebbs and flows, which can be scary when you are looking at it from day-to-day. Some more risk-happy and aggressive investors have the inclination to make investment decisions in an attempt to “time the market,” a common short-sighted pitfall; thankfully, dollar-cost averaging can help remove that temptation and provide a certain discipline.
If you find yourself on the other end of the risk spectrum and fear is the thing holding you back from beginning your investment portfolio, dollar-cost averaging (DCA) can help you take the leap. The prospect of a market drop can be a terrifying thing for many investors, but the stability offered by a DCA approach makes it the perfect way to get started without the looming fear of regret in the face of a worst-case scenario.
Dollar-cost averaging is a wonderful technique, but we agree that it may not be the investing method for everybody or for every situation. If you’re still on the fence, here are some scenarios that indicate DCA might be the right approach for you (and some tips to leverage its benefits):
- You’re just getting started. If you’re younger with only a small portion of money that you can spare in an investment, this method is a feasible route for you to learn the ropes while developing a sense of discipline that will benefit you as your portfolio and investment savvy expand.
- You’re able (and willing) to make regular fixed contributions. This means you are able to leverage the benefits of DCA that account for the ups and downs in the market. If you feel inclined to adjust your investment, you’ll disrupt that balance and nullify the purpose of DCA.
- You are committed. Do not abandon your DCA strategy during a stormy market; this is a strategy that only makes sense if you are a person who can ride out the storm. It’s all about follow-through.
- You don’t have a large lump sum to invest. If you have a big pile of money, first of all, nicely done, and second of all, don’t let fear keep that stack of cash out of the market for too long. You are more likely to have large returns if you go ahead and put that money to work at once. In most cases, it is best practice to save DCA for the small bits of extra income that you can commit to recurrent investment, not necessarily the large bits of savings you have burning a hole in your pocket.
- You’re mindful of trading costs and transaction fees. Implementing the DCA approach will mean buying into the market regularly, so it is important to pay attention to these costs that may add up. Don’t avoid DCA because of this, just be sure to do your homework so you know what to expect. Costs may vary quite a bit from brokerage to brokerage, so you’ll want to find the best fit for your needs.
How it applies to cannabis investing
With the power of knowledge, you can now go forth into a dollar-cost averaging investment strategy. But deciding what to invest in is your next big quandary. The mountain of options is truly overwhelming, and it can be very difficult to know where to start. But have you considered the lucrative market of pot stocks?
The legal cannabis industry is still young, and cannabis investing is taking off.
We are seeing marijuana being legalized state-by-state, meaning that as the movement sweeps the nation, the investment opportunities are only going to grow. In fact, U.S. marijuana sales are estimated to reach $80 billion by 2030 if cannabis is legalized federally. That’s a lot of green for a lot of green.
There are various types of cannabis stocks in the market today that you can invest in, depending on your interest. You may seek investment in cultivation operations and other “plant touching” companies. Or, it might be more up your alley to invest in marijuana-business related services, such as companies that service the marijuana industry by way of real estate, consulting, business development, technology, etc. Furthermore, cannabis is also making its place in sin stocks, as alcoholic beverage companies are jumping on the canna-train with pot-infused product offerings. Research the market and choose an investment that speaks to you.
A key benefit of applying the dollar-cost averaging approach to investing in pot stocks is that the industry is so young, we really can’t be sure what to expect. As the DCA approach is made to smooth out the ups and downs and minimize risk in investments, it is a smart way to get started investing in an industry this fresh. The cannabis industry is likely to continue upward, but while we anxiously await finding out what the “normal” will really be, dollar-cost averaging is a good strategy for putting pot stocks in your portfolio.