How to Know You’re Ready

June 29, 2022

As Mr. Miyagi taught us:

Walk on road, hmm?

Walk left side, safe. Walk right side, safe.

Walk middle, sooner or later…get squish just like grape.

If we’re all-in on trading, we’re safe. If we don’t want to trade, we’re safe. If our trading mentality is, “I guess so…”, get squish just like grape.

Most of us are guess so, unfortunately. How can we change that?

One way is to put a ton of importance on each decision. We mentioned that on Monday. Trying a bunch of systems in order to “fail fast” almost always turns into a nightmare.

Try this, lose. Try that, lose. Try that new system, lose…

Not great for wealth-building.

But Warren Buffett gives us another way. Instead of being a system tourist, what if we only got 20 decisions the rest of our investing life? If we could only choose 20 systems in the next 50 years, we’d probably give each decision a lot of thought.

And thinking is a good thing.

There’s another way, and it uses the favorite method of the financial advisor industrial complex: Dollar Cost Averaging (DCA).

We’ve talked about DCA before but here’s a quick reminder. DCA means that we put money into our trading account on a regular schedule. We don’t add when we feel like it or when a guru tells us to or when we have a gut feeling the market is ready to move.

We add money every month. No exceptions.

The experts tell us to do this because “you can’t time the market.” Of course that’s not true, but we’ll finish the thought. Because we don’t know how to trade and we never know what the market might do, adding money every month keeps us on track. We’ll be adding as the market goes down, thereby lowering our average cost of our stock or index fund. And we’ll also be adding as the market goes up, which allows us to “pyramid” into a winning trend.

Wait, isn’t it more profitable to just put all of our money into a trade right at the start? Yes, most of the time.

But most people don’t have a bunch of money at the start. Most people have a little at the beginning and can add a little each month along the way.

Therefore, DCA keeps a regular person on an investing schedule and sometimes luckily turns into a better investment in the end. It’s the same as scaling into a position. Not all our money is on the table at first, so drawdowns aren’t as painful. And we add to our position as it hopefully becomes profitable.

Here’s an example.

Let’s say we have $600 to invest on January 1, 2020. Good timing! And let’s say we can save $100 each month.

If we invested that $600 in SPY (S&P 500 ETF), we would have gotten 2 shares at $321.86 for a total investment of $643.72.

As of June 24, 2022, our 2 shares would now be at $390.08 and would be worth $780.16. We’ve made about $136. In this time, we would have saved $2,800 in our savings account. By investing initially and saving the rest, we’d now have $3,580.

If, instead, we’d put that extra $100 into our trading account each month and bought more shares every time we could afford it, we’d have $3,664 from 2020 to now. In this case, DCA actually made us more money.

But, strangely, that’s not the important part.

The important part of DCA is that it forces us to commit. Why add to something that’s going to fail?

No, it forces us to make a decision beforehand that we trust the market, we trust buy-and-hold, and we trust ETFs.

If we commit to DCA, we’re committed for life. We’re not guess so anymore.

And the commitment is the most powerful thing we can do for our trading. It’s even more important than the extra money.

When we commit to DCA, we’re ready.

In our next Newsletter, we’ll put this method to work on a more lucrative strategy.

We’ll see how it does.

In the next Newsletter, we’ll look at how Futures might handle bearishness.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.