How I Made Money in a Tough Economy: The Dollar-Cost Averaging Advantage

I sold my three-bedroom condo and put $20,000 in the stock market in March 2022. “What could go wrong?” I thought.

The answer was the stock market crash of 2022. By October, the S&P 500, an index that tracks the performance of the 500 biggest publicly traded U.S. companies, had lost almost 25% of its value compared to the beginning of the year.

But I didn’t lose any money thanks to a simple strategy called dollar-cost averaging. Using this method, I bought more shares when they were cheap and fewer shares when they were expensive. Here’s how this panned out for me.

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How I used dollar-cost averaging to rescue my investment

Dollar-cost averaging is a strategy that involves investing a fixed amount of money at regular intervals, regardless of the market price. For example, I could use this strategy to invest $500 every two weeks or $750 every month. You can choose your own amount and interval, but it’s best to invest regularly.

What does dollar cost averaging look like in real life?

I began investing about $1,000 every month by setting up an automatic recurring transfer of $250 every Monday from my SoFi Checking¹ account to my investment account with Charles Schwab, one of the best online brokerages.

I divided my investment equally between two popular exchange-traded funds (ETFs):

• Vanguard Total Stock Market ETF (VTI): This is an ETF that encompasses the entire U.S. stock market, including small, medium, and large companies. VTI holds about 3,500 stocks, meaning that by investing in it, I invest a bit into each of these stocks.
• Vanguard S&P 500 ETF (VOO): This is an ETF that tracks the S&P 500 Index, which includes the 500 largest U.S. companies. VOO holds about 500 stocks, which helps me focus portions of my recurring investments on these large companies.

How did this strategy play out in 2022?

Between March and December 2022, I ended up buying:

• 23 VTI shares: With a low price of about $179 per share and a high of about $242 in 2022, my actual average cost was $219 per share. That’s a total of about $5,037.
• 13 VOO shares: With a low price of about $327 per share and a high of about $439 in 2022, my actual average cost was $397 per share. That’s a total of about $5,161.

In total, I invested $20,000 in one lump sum plus $10,198 in regular contributions in 2022. I didn’t stop there, though. I continue to use this strategy to this day.

Did dollar-cost averaging help me?

My investment portfolio was down 4.36% by the end of 2022. While this was certainly a loss, it was only a third of the 13.54% drop my portfolio experienced in October 2022.

It was also a smaller loss compared to the 7.34% that the S&P 500 lost over the same period. In the chart below, my portfolio’s performance is the blue line, while the S&P 500 performance is the orange line.

An interesting effect to point out is that while my portfolio avoided the biggest losses (as pointed out with the blue arrows), it also didn’t experience the biggest gain (as pointed out with the red arrow).

This effect is typical of dollar-cost averaging. This strategy aims to balance out gains and losses, making it a great strategy for the long run.

By the time we entered 2023, my portfolio began seeing positive returns. It has gained 3.65% over its lifetime as of September 2023.

This might not seem like a huge gain, but it’s important to remember that surviving 2022 and ending up with a positive net return in 2023 is, on its own, a small achievement.

Plus, this achievement was made with almost zero effort on my end. My regular automatic contributions meant that I didn’t spend energy analyzing the market, listening to investment gurus, or reading up on the latest stock news.

4 important investing lessons I learned along the way

My experience with dollar-cost averaging during the tumultuous year of 2022 taught me four valuable lessons about investing.

1. Diversify my portfolio

My investments in VTI and VOO were a portion of my larger approach to investing. During the same period, I also invested in Treasury bonds to benefit from the record-high 9.62% rate that Series I bonds offered between May and October 2022.

Additionally, I saved up money in high-yield savings accounts, which allowed even the money I wasn’t investing to earn a healthy return.

These factors and others helped my overall financial picture remain diversified, which protected me against market downturns and provided overall stability.

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2. Avoid large lump-sum investments

I started my portfolio with a single investment of $20,000. This was a mistake because I didn’t stretch this sum over a period of time, which left me immediately exposed to the volatility of the stock market.

Since the market went down right after I invested, I lost money and had no opportunity to average down my cost for the initial $20,000. It took several months of regular contributions to balance my portfolio.

A better strategy would have been to invest in smaller amounts over time. For example, I could have invested $2,000 per month for 10 months. This way, I could take advantage of the dollar-cost averaging effect and reduce the impact of market fluctuations on my portfolio.

3. Stay consistent

Dollar-cost averaging works best when I make regular, consistent contributions to my investment portfolio. By automating my contributions, I removed the emotional aspect of trying to time the market.

Contribution consistency also helps smooth out volatility. The stock market can be highly volatile, but using consistent contributions can help balance high share prices on one day with low share prices on another. This could offer a more stable portfolio performance.

4. Avoid realized losses

Whatever gains or losses your asset experiences aren’t actualized until you sell the asset. This is why we call losses before selling an asset as paper losses, or unrealized losses.

This “paper losses” concept emphasizes the importance of holding onto your investments, despite market fluctuations. It also highlights the benefits of having a long-term perspective and seeing the potential for markets to recover over time.

I kept my paper losses in sight and maintained my investments while avoiding potential costs, such as capital gains taxes. However, I still periodically reviewed my portfolio to ensure it aligned with my financial goals and risk tolerance.

My favorite investment apps

I enjoy investing since it helps me put my money to work. Whether for my short-term goals three to five years away, or my goals that are much further down the line, such as retirement. But where should you start? Here are a few of our favorite investment apps.

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Bottom line

2022 was a tough year for many investors. But even though it was a challenging year, I learned several key lessons that shaped my investment strategy overall. I realized that diversification is crucial to reduce risk and volatility and that timing the market with large lump-sum investments can be costly.

Finally, I learned not to panic and sell my assets when the market is down. That would have only served to lock in my losses, and it would have prevented the gains I saw when the market recovered.

You can begin your own investment journey by learning how to invest or by using one of the best robo-advisors to help implement many of the lessons I learned.