Many people spam the term DCA whenever they are unsure of what to do next in the market. To be fair, it is by and large the best way to invest over long periods of time. However, there are dangers when executing DCA because this strategy does not work with all types of stocks. In addition to that, long term DCA might even result in losses during a severe downturn. At such a point, how would an investor who has used DCA for several years get out of that mess? In this post, we will be highlighting potential mistakes committed when executing DCA and how investors can avoid feeling stuck in the market.

DCA does not work well for growth stock during an aggressive rally

First of all, DCA is used to overcome the difficulties of timing the market in general hence, if you decide to DCA to accumulate a particular stock or ETF, it might work assuming that its price does not go up too much too quickly. Remember that DCA is used to try and get an average price or even lower overall price of a particular counter therefore if your strategy is not achieving that outcome, you should consider changing your strategy. That said, there are exceptions when DCA still works in a counter that is ever rising. For example, you can think of some stocks like FAANG, Tencent, and Alibaba which stock prices have risen thousands of percent since inception but those normally are not easy to spot and trust especially during its earlier years.

Using frequency or price range as a target for DCA?

Some people believe that stocks are a great way to save money because many popular stocks have a track record of paying dividends over time. The issue with this strategy is that DCA is often executed blindly or rather in a periodic manner. Rightfully speaking DCA strategy does eliminate the need to time the market since the price of entry does not necessarily matter. However, in my experience, DCA can only more optimal when you set a price range as a target rather than a time interval (annually on 12 Dec for example). Instead, it is easy to just save up the necessary funds and employ them when the share price is within the desired range. This strategy works really well with cyclical stocks which are generally in a long-term consolidation phase. That way, you will be able to take advantage of the lower entry prices and still enjoy the dividends most of the time as compared to paying a much higher price premium which will decrease your overall yields if bought at highs.

You can always sell the lower priced tranches during a downturn

DCA strategy is good for accumulating shares but it will not be wise to hold through an entire downturn. Instead, you can always choose to lower your exposure and risk by selling the tranches bought earlier factoring in dividends to retrieve some capital if possible. this in a way also allows you to reduce your losses if the stock price continues to plummet and at the same time prepare you for lower prices for reentry. Many passive investors are prone to holding on to their stocks even during major downturns but that will potentially wipe out years of profits and dividends collected if you think about it. While there is no need to monitor the market, there is still a need to take action once in a while.

Closing Thoughts

This post is made primarily to inform you guys out there that DCA is not a foolproof method in all situations. Precisely when you have capital at your disposal, blindly executing DCA is less than optimal. In my opinion, DCA is effective when dealing with Cyclicals with an obvious price range or consolidation zone, that way you will be able to plan ahead for Ex-Dividend dates, entries, and exits.