You never realize the impact you have on your kids until you hear your very own words flying back at you. And then you think, “Damn—I’m smart!”
That was the actual thought I had during a FaceTime call with my son recently. He rang to share with me a small victory he’d had day-trading crypto. I congratulated him, and then, like a good parent who has survived the trenches of Wall Street for 35+ years, I dutifully cautioned him about the risks of day-trading.
And that’s when he surprised me.
“Don’t worry, Dad. It’s what I can afford to lose. Plus, I’m dollar-cost averaging.”
Now, my son has been on this planet for 24 years and nine months. In that time, he has never once strung together the words “dollar,” “cost,” and “averaging” in the same sentence in my presence.
If there was a game show like the old Newlywed Game, but for parents and their kids, and the host asked, “Does your child know what dollar-cost averaging is?” I would have most assuredly lost that round.
Now, here I am sitting in a Prague coffee shop with my iced latte and cinnamon roll, just the proudest of papas as I share this story with you. All those years as a kid listening to me jabber about stuff that I absolutely know bored him to death…and he actually absorbed it.
Which is my long-winded windup into my own story of dollar-cost averaging.
I’ve been doing it for years. For all the decades that I’ve been an investor, in fact. Started with shares of Wisconsin Energy in the early 1990s because I liked the big dividend it paid. Learned it from my grandmother, who despite her small income as a chemical company secretary, managed to invest $25 a month in her company’s stock—the shares of which she bequeathed to me at her death and which I still own today.
I tell you all of this because it’s all related: My son, my granny, dollar-cost averaging, and crypto.
If you’re a regular reader of Field Notes, you know I’m a big fan of the cryptoconomy because of the opportunity it represents. But you also know that I am practical about crypto and I regularly caution you to avoid the crypto market if the insane volatility makes you crazy.
Well, that’s where dollar-cost averaging comes in. It’s a great way to slowly build your position in crypto over time, without putting all your capital at risk from the get-go.
I mention this because I know from my emails that a lot of readers want to dip their toes into crypto, but they’re rightly cautious about doing so since the volatility we’ve recently seen in bitcoin, Ethereum, and all the others is off the charts.
What’s a good price? What’s a bad price? Who wants to stick a ton of money into a coin, only to see it sink in a broad, market selloff?
Dollar-cost averaging does away with those fears. And it’s simple to implement. I’ll use an example in my own trading to explain it.
Every week, I am putting $20 into what I will call Coin A. (I won’t name the crypto because I employ this strategy for a variety of cryptos with varying levels of investment risk and I don’t want this to come off as a recommendation. Check out our Global Intelligence Portfolio for the cryptos I do recommend as solid long-term investments.)
This $20 investment happens automatically, without me even thinking about it. I’ve set up my Coinbase account so that Coinbase dips into my bank account every Sunday, pulls out $20, and buys whatever amount of Coin A that $20 buys at that moment.
On some Sundays, I’ve purchased as much as 1.405 of the coin in question, implying a price of $14.23. On other Sundays, I’ve bought as little as 0.361, implying a price of $55.41. And that’s the point of dollar-cost averaging: My purchases are spread across the entire price spectrum.
There are a few benefits to this approach:
- My average purchase price over time is likely to be better than had I put all my money into Coin A at one price.
- I don’t have to worry that I bought at the wrong moment. If I’d put all my cash into Coin A at $55, I’d be frustrated right now with the crypto back at $18 after this big selloff we’ve seen.
- I don’t torment myself with questions like, “Is now the time to buy? Is this a good price? Should I wait? What if I wait and I miss the chance to buy now? What if I buy now and the price plunges?” With dollar-cost averaging, I remove all the questions except one: Do I like this project? And if that answer is yes, then I don’t mind buying regularly at various prices because I know I will come out better in the end.
All told, I have nearly 72 Coin A in my account now. The accumulation has been so painless since I never think about the $20 that leaves my account weekly.
You can set up dollar-cost averaging at Coinbase as well as Binance.US, the two crypto exchanges I recommend. And you can dollar-cost average your way into just about any currency those exchanges offer access to.
You can choose to invest daily, weekly, bi-monthly, or monthly. I’ve chosen weekly so that I can benefit as much as possible from price volatility, meaning I’m likely to be investing at what is the average price over the course of a given month. I just looked at my four weekly purchases of Coin A in June: They averaged $24.08. Coin A’s average price in June was about $25.59…so I bought at a slightly better price.
If the crypto market scares you—and I totally understand why it would—consider dollar-cost averaging as a way to slowly build your position with an amount of money you’re comfortable investing on a regular basis.
Or, if there’s a larger sum you’re willing to invest right now—let’s say it’s $5,000—dollar-cost average your way in with $250 a week over the next five months. Chances are your average price will be lower than had you picked a single day to invest.
Better yet, you’ll have built your position without all the worrying that maybe you picked a bad moment to put all that cash to work at once.