Investors look to precious metals for a variety of reasons—preservation of wealth, market security, and as a hedge against inflation to name a few. However, navigating the waters of precious metal investing can be a time-consuming endeavor. Following market trends and finding the best time to buy low and sell high can be a particularly taxing experience considering the time spent and the additional fees that come with precious metal storage and liquidity.
One strategy that helps investors focus on long-term profits while avoiding the short-term volatility of spot prices is dollar-cost averaging. With dollar-cost averaging (DCA), investors put a fixed dollar amount into an asset at regularly scheduled intervals. This method helps investors avoid the emotional and time-consuming process of watching the markets and hoping for low prices. Predicting the market is no easy feat, and DCA helps investors gradually move their wealth into assets that have the potential to make large returns.
Should I Use Dollar-Cost Averaging?
DCA is not for everyone. Researchers at Vanguard found that investors who have a lump sum available have a better chance at making higher profits by investing at one time rather than over the course of a longer period. This is because the market values rise with time. Historically, the odds of higher returns are in favor of lump-sum investors (LSI).
But for many, LSI is not an option. Those who do not have cash on hand can lean on DCA to help them gradually transfer their wealth into assets such as stocks, bonds, or precious metals. DCA is not always a loss; for some, the peace of mind of investing long-term and avoiding the possibility of LSI losses due to market downturn is worth it. Investors who have low risk tolerance may see DCA as a better option.
In summary, investors who could benefit from DCA have:
- No immediate funds for LSI
- Long-term investment goals
- Low risk tolerance
How Can I Apply Dollar-Cost Averaging to Precious Metals?
Using DCA for precious metals is easy. If you meet the criteria above, DCA could be your avenue for accessing the precious metals market. Below are 3 steps to help you get started with DCA:
- Set a goal. What do you want out of your investment? If DCA is a means for you to accumulate a commodity such as gold or silver, have an amount in mind that you would like to reach. Once you reach that goal, reassess your investment strategy to see if it is still the best option for you.
- Determine the size and timing of your investment. Figure out how much you want to spend on your investment and at what intervals you are willing to invest. Make your investments work for you. If you need to adjust your strategy, feel free to do so depending on the markets or your means.
- Be mindful of the markets. Even though DCA is used to avoid the stress of watching the market, you still need to be aware of market trends. It is pointless to continue investing in something that is declining in value. Fortunately with precious metals, history has shown that gold and silver values rise with time.
Although dollar-cost averaging may be right for some, it is not the only option out there for investors. There are many strategies to consider when capitalizing on the precious metals market. For more information on other precious metal investing strategies, check out these links: