Dollar-Cost Averaging Precious Metals Positions


Dollar-Cost Averaging Precious Metals Positions Hero Image

Whether you have already invested in precious metals or are doing so for the first time, it’s always a great idea to consider your investment options and strategy. An important investment decision you will have to make is how to allocate your capital across your precious metals.

Will you invest your capital all at once? At specific time intervals? Or maybe you will try to time the market and invest at the lowest price?

These investment questions are answered by your allocation strategy or the method you use to deploy capital into your precious metals positions. One of the most common allocation strategies is dollar-cost averaging, a method of regular, fixed investment used by savers for decades.

Let’s look at why you might opt for dollar-cost averaging in your precious metals positions and how this strategy differs from others.

What Is Dollar-Cost Averaging?

Dollar-cost averaging, better known as DCA, is a method of investing in which you invest a set amount of money at fixed intervals. By investing fixed amounts regularly, DCA spreads out your purchases over time, thereby allowing you to invest at lower prices than you might otherwise if asset prices fall.

Even billionaire investor Warren Buffet is a fan of dollar-cost averaging: “Don’t put your money in all at once; do it over a period of time.”

DCA is a widely chosen investment strategy for investors for several reasons:

  • Set it and forget it – There is a lot going on in life, whether it be work, family obligations, or anything in between. Most investors don’t have time to monitor the markets daily and watch for the exact right entry points to invest in. By using DCA, you can build a preset investment schedule and not have to worry about tinkering with your investment strategy over time.
  • Invest as you earn – You don’t need a lot of upfront capital to start to DCA. Instead, you invest small portions of capital over time, making it easier to invest at the same pace you earn.
  • Eliminates market timing – The majority of investors who attempt to time the market fail. DCA takes the guesswork out of timing the market and instead invests regularly no matter what is happening with precious metals prices.
  • No emotions necessary – Emotional investing makes for bad investing. Prices fluctuate, and those who get caught up in market prices’ emotions can quickly lose their cool. A regular investment schedule offloads the emotional side of investing and makes investment decisions straightforward and logical.

As with any allocation strategy, DCA isn’t perfect. When precious metals are growing in price, dollar-cost averaging will pay a premium for these assets over time instead of making a single purchase upfront. DCA could lead to lower returns over the long run. But given the unknown nature of market and price fluctuations, DCA mitigates the risks of unknown market fluctuations through its automatic investment schedule.

How DCA Works

As previously mentioned, dollar-cost averaging involves investing in an asset at regular intervals over time. But what does this look like in practice? Let’s use an example to find out. In this example, you are investing in gold for your Precious Metals IRA.

Please note that this is a hypothetical example, and all figures are for example purposes only.

Imagine you want to use DCA to invest in gold. You have $10,000 to invest, and the price of gold today is $2,000 per ounce. You decide to use dollar-cost averaging to invest your capital evenly over the next 10 months. Let’s look at how your performance stacks up as the price of gold fluctuates.

Month Contribution Gold Price Ounces Bought Ounces Owned Total Value
1 $1,000 $2,000 0.5 0.5 $1,000.00
2 $1,000 $1,800 0.56 1.06 $1,900.00
3 $1,000 $1,900 0.53 1.59 $3,005.56
4 $1,000 $1,950 0.51 2.10 $4,084.65
5 $1,000 $2,100 0.48 2.58 $5,398.85
6 $1,000 $2,100 0.48 3.06 $6,398.85
7 $1,000 $2,000 0.5 3.56 $7,094.15
8 $1,000 $2,050 0.49 4.05 $8,271.50
9 $1,000 $1,800 0.56 4.61 $8,262.78
10 $1,000 $2,100 0.48 5.09 $10,639.91

 

At the end of this 10-month period, you own 5.02 ounces of gold compared to 5 ounces if you had invested all of your capital at once. This hypothetical example puts your average purchase price at $1,980 compared to the price of $2,000 at the beginning of the time period. All told, at the end of the 10-month example, a DCA strategy would have netted you an additional $139.91.
The big idea here is simple: you buy slowly, over time, in smaller pieces. When prices are lower, you get a bit more; when prices are higher, you get a bit less. Overall your average price is somewhere between the highest and lowest prices you paid. Many people find DCA less intimidating or frightening than lump-sum investing.

Note that this is only one hypothetical example of DCA and should not be taken as investment advice. While a DCA strategy in this example yielded a positive return, this will not always be the case.

Alternatives to DCA

A Single Investment with Lump-Sum Investing

If the best time to invest in precious metals was yesterday, wouldn’t you want to invest as much capital as you can right away? Investing at the right time is the idea behind lump-sum investing. Using this strategy, you would invest all of your capital at one time into your Precious Metals IRA. Therefore, your entire sum would be invested for a longer period than any other allocation strategy. However, lump-sum investing may not be a viable strategy for retirement accounts like IRAs due to annual contribution limits (and you cannot invest more than the limit). On the other hand, when rolling over existing retirement account funds, you can choose to direct as large a portion as you like into precious metals.

Lump-sum investing can be a positive since, in general, the longer your investment exposure, the more time you have for the investment to grow. Yet, this can also backfire, mostly if the lump-sum investment was made when precious metals prices were elevated. If you knew for certain prices were going to rise, lump-sum investing would make sense. In a high-inflation environment where your cash was losing purchasing power daily, lump-sum investing might also be the right strategy.

Lump-sum investing is the least time-intensive and easiest investment allocation strategy. On the other hand, it requires a great deal of courage and fortitude.

  • Benefit – Least time-intensive and most straightforward strategy to implement
  • Drawbacks – Investing all at once means you invest all of your capital at one price and can’t take advantage of price fluctuations. Additionally, lump-sum investing requires a sizable investment upfront, making it not a viable investment option for everyone, especially those that are just building their investments and savings. Consider this example: with DCA, a saver can put away $500/month and, over ten years, build a $60,000 balance. A lump sum investment requires the saver to have all $60,000 on-hand, ready to invest at once.

Adjusting Portfolio Allocation with Value Averaging

Similar to dollar-cost averaging, value averaging involves a steady regular investment contribution. Except with value averaging, your investment varies based on your target growth rate and portfolio performance instead of investing a set amount for a given time frame like DCA. Value averaging was popularized by investing guru Michael E. Edleson in his book, Value Averaging.

Value averaging requires you to set a growth rate for your portfolio and base your contributions on your portfolio’s performance over a given time. If your portfolio outperforms your expectations, you invest a lower amount, but if the portfolio underperforms the target rate, you invest more to compensate. This ensures that your portfolio value will maintain certain values that you have predetermined.

However, if your portfolio performs poorly in any given time period, it could require you to invest significant capital in balancing out the poor performance. That makes it difficult to anticipate the regular investment in your portfolio using value averaging since the investment amount can change drastically over time.

  • Benefit – Takes into account portfolio performance over time when determining investment allocation.
  • Drawback – More complicated and may require higher regular investments if your portfolio doesn’t perform well. Value averaging will also be a difficult strategy to implement for those on a fixed income who can’t afford varied capital investments over time.

Timing the Market by Buying the Dipbuy the dip

In this investing strategy, you actively monitor the market for the best buying opportunities. When the price of precious metals falls, you “buy the dip” and pay less than you otherwise might’ve paid. This lowers your cost basis and can increase your profit potential. Buying the dip generally requires some technical analysis knowledge, which is a method to help predict the price of an asset based on its previous price trends, trading volume, and other factors.

However, buying the dip is a strategy aimed at active investors and traders who are confident in their ability to time the market. Those that time poorly can end up buying at a bad price, “catching a falling knife” or (if prices never go down) missing out on growth potential entirely. Buying the dip is also a strategy that is only feasible to investors who have extra cash or transferable assets lying around to invest or exchange into other assets like precious metals. Identifying a market dip is useless if you don’t have any capital to invest.

  • Benefit – Flexibility to determine the best time to invest as prices move lower
  • Drawback – Requires time and attention. If you time the market wrong, you could miss out on an investment opportunity and lose out on portfolio gains.

What’s best for you?

Every investor is different. The investment allocation strategy that works best for someone else might not be the right choice for you. Consider the following questions when choosing an allocation strategy:

  • How much time do I want to spend monitoring the markets?
  • How involved in the process do I want to be?
  • Will I have the capital to invest regularly?
  • Do I trust my own investing knowledge and judgment?
  • Can I stick to a plan I’ve established even when it’s frightening?
  • How will trading and/or broker fees play a factor in my allocation decision?

Before you decide on an allocation strategy for your Precious Metals IRA, it may be best to consult with a financial advisor to learn more about these precious metals investment strategies and decide what’s best for you.