Investing savings is a decision that is as important as it is necessary for the future. In these times, with inflation doing its thing, it is convenient to invest that money that is not needed for day to day, that is saved every month, but that loses value in the current account. Imagine investing that money as if it were a receipt or one more transfer per month. This is one of the keys to the so-called periodic investment, which receives the technical name of Dollar Cost Averaging or DCA.
This investment method has a very simple operation: it allows you to invest the same amount of money every month regardless of what time the market is. It is only necessary to decide how much money will be invested monthly and in which investment product –investment funds, a Unit Linked, a PIAS or a robo-advisor are some examples– taking into account factors such as our risk profile, point out the experts at Fundación MAPFRE . The next step is to schedule the investment, which can be as easy as allocating a recurring transfer every month on the same day of the month. This is how the investment becomes one more receipt.
Periodic reversal or DCA system works for various reasons. One of them is that it fits with the finances of a large part of the population, since most people have more savings and investment capacity than money saved to invest. It is not the same to invest 3,000 euros at once than to make the effort to invest only 150 euros per month. In fact, this method can be applied when you have saved an amount of money and want to invest, or for the part of your budget that you want to allocate to investment every month.
Another reason is that the general trend of the markets is bullish much longer. This means that the risk of suffering losses is reduced as the time you are investing increases and, in addition, in the long term the stock market tends to rise. As it is invested every month automatically, there will be times when you will buy more expensive, when the market is rising, and others when you will buy cheaper, when the market falls. At the end of the road, it will be possible to invest at the average market price (hence the name average for this system), which is very interesting when investing in the long term.
“The important thing is to continue making your contributions religiously regardless of whether things are going better or worse, because if you try to go in and out as you see fit, things are going to go up or down, chances are, instead of avoiding falls , be late for increases”, explains finance expert Natalia de Santiago in Invest with little about this strategy. Thus, the DCA strategy allows us to enter the markets on a regular and constant basis and benefit from the long-term upward trend without suffering so much from the short-term swings.
This long-term strategy, so comfortable and easy to execute, can take greater advantage of the power of compound interest. In this way, the profit generated by the investment is reinvested and the contributions made each year are added up. Experts point out that compound interest is one of the best levers to make invested money grow and it only takes time to work and create a snowball effect.
In addition, the DCA system eliminates the stress of having to make money and investment decisions every month, a stress that can increase in the case of novice investors, who are not used to dealing with market movements. And it is that everything that has to do with personal finances has an emotional part that must be taken into account, point out specialists from Fundación MAPFRE.
Investing can be scary and most people wait before taking the leap. If you already have the money, investing all at once – the lump sum method – can offer better returns than doing it little by little, although, as some studies point out, it also entails greater risks. If you invest in small amounts, you diversify the initial risk of suffering losses and make possible falls in the market more bearable. Thus, if through regular investment, 10% of the money is invested and the market falls after two days, it will be a small bump, but not a huge pit.
“Since they are small amounts, it is not so dizzying and we avoid that paralysis so common that the years go by – and inflation – without taking the first step,” says De Santiago. "The more time you have to see your investments grow, the less risk you'll be taking and the more time you'll be giving your money to accumulate interest and pick up speed," he adds. Therefore, novice savers and investors have at their disposal a good tool to grow their money based on patience without constantly having their eyes on the market.
