The Return on Investment (ROI) is the key tracking signal that indicates the amount of profit or loss on an investment. The ROI is calculated by dividing the current value of an investment by the amount invested. An ROI above 1.00 shows the (%)profit. An ROI below 1.00 shows the loss.
Dollar Cost Averaging is a technique in which a planned investment amount is divided into equal portions and the portions are invested at fixed intervals of time until the planned amount is reached. This is most useful when the investment is unstable and fluctuates between highs and lows. Less of the investment is purchased at highs and more is purchased at lows.
The longer the time period is observed, the more reliable the signal (ROI) will be. Conversly, the shorter the time period is observed, the less reliable the signal will be. An ROI based on one year of history certainly tells us how our investment performed during the year. If we divided our total investment into 12 portions and invested one month apart all the highs and lows will have occurred. At the first purchase we don’t know whether the ROI will be going up or down. At year’s end we will have observed the lowest low but that time is unknown at the start.
The investment amounts must consider the transaction fees, more properly called commissions. Coinbase charges 4% for “small” investments. Banks are starting to charge a “non ATM withdrawal fee”. My bank charges $5. Together, on a $100 purchase there are $9 in fees. The ROI starts at 0.91. The effect is worse on smaller amounts. Therefore plan to make purchases of at least $100 and more if possible. The fees must be tracked, but they will be ignored in what follows. The actual ROI can, and should be, calculated at any time.
During the investment period stick to the plan. Do not pay any attention to market fluctuations. At the end of the period stop and watch. If your investment is good, your ROI will be greater than 1.00. If it’s really good maybe you decide to cash out or perhaps invest a little more. As an example, let’s say my ROI is 1.25. If I cash out I will have made 25% on my investment. Not bad. If I invest more I need a new strategy.
Wait until the ROI goes up a little more, enough to cover the fees. Then invest the original portion amount. This will lower the ROI. Again wait until the ROI is above 1.25. Continue until you are no longer comfortable with the total investment. At this point in history we are playing a game and the game can be lost if we are not careful. I will explain this in my next post.
For myself I am investing at 6 day intervals for 3 months. That will be a total of 15 purchases in the first half of 2018.