Portfolio Strategy Alternatives to Diversification

Diversification dominates most discussions of market strategies. You need to spread risks while managing profits and losses, meaning constant monitoring and rethinking of past decisions. That is the nature of investing, and in uncertain markets, diversification is essential.

Beyond the need to spread risks, additional strategies can be very useful. Among these is (DCA), a method of placing a fixed dollar amount into the market periodically. The theory behind DCA is that the averaging effect reduces risk and is beneficial over the long term.

Under this plan, you pay in the same amount each period (monthly, for example).

If the price per share rises, you buy fewer shares; if it falls, you buy more shares. So you make three decisions with a DCA plan: the amount you invest, the frequency of transfers, and the overall time period over which the DCA plan will be made.

Key Point

Dollar cost averaging is a formula for investing the same amount periodically. It is a strategy, and there is no guarantee that DCA investors will always make a profit.

A study of what happens if the stock price moves up or down shows how DCA has appeal to many people. For example, if you transfer $500 per month into a stock currently selling at $20 per share, what happens if the stock price rises every month? An example is shown in Table below.

[caption id="attachment_12685" align="aligncenter" width="515"]Dollar cost averaging, rising market Dollar cost averaging, rising market[/caption]

By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2020. Content published with author's permission.

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