Ecoinometrics - Dollar cost averaging the drawdowns
Is it a good strategy to build positions by dollar cost averaging only in the drawdowns?
There is an infinite amount of variations on the dollar cost averaging strategy. How often you buy. How much you buy. What conditions trigger you to start dollar cost averaging. These are only a few of the obvious parameters.
Today we look at the variation on the “what conditions” parameter. What if you bought only in the drawdowns?
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Dollar cost averaging the drawdowns
This is not the first time we talk about dollar cost averaging (DCA). Among other things we have examined what would happen if you were to dollar cost average more during the dips and most recently we compared dollar cost averaging and lump sum investing when you bet on an exponential trend.
One of you readers asked me whether or not it is worth it to dollar cost average positions only during the dips.
To try to figure that out we’ll run the math on three different examples (the stock market, Amazon and Bitcoin) but let’s put in place the framework by focusing on Bitcoin first.
Say you are buying some Bitcoin every Monday. You put the same amount every time, $100 to keep the math simple. That’s the standard dollar cost averaging strategy.
Now what if instead of buying every Monday you checked the value of Bitcoin first? If you see that Bitcoin is more than 10% below its all-time high you do dollar cost average $100 on that day. If Bitcoin is not in a drawdown of at least 10% you don’t do anything.
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