Dollar-Cost Averaging: The All-Weather Investing Strategy for 2024 and Beyond

In the realm of investment strategies, dollar-cost averaging (DCA) emerges as a steadfast beacon for 2024 and beyond. Rooted in the wisdom of Benjamin Graham and later praised by Warren Buffett, DCA stands for an ultimate approach to bypass the complexities of market timing and emotional biases. Through disciplined weekly, monthly, or quarterly investments, one can navigate market volatility with ease, preserving capital in downturns while embracing growth opportunities in bull markets.

Even a small amount invested consistently can snowball into a significant sum over time.

While the strategy has been long-used in public markets, the private domain has hitherto demanded a substantial entry ticket, often starting at CHF 250’000, a million, or more, thereby limiting the utilization of DCA to the echelons of the ultra-wealthy. Luckily, Moonshot is changing the game by establishing DCA in the private domain, empowering investors to access previously out-of-reach opportunities with a minimal monthly commitment of just CHF 300. With Moonshot's innovative touch, the triumph of DCA in mitigating risk and maximizing returns becomes a beacon for investors seeking a disciplined and proven method for navigating the intricate landscape in both public and private realms.

Old, but gold: A Graham- and Buffett-tested investment approach

Over time, investors have explored various strategies, many of which, while effective, prove challenging for non-professionals to execute. Among the plethora of these, only one has stood the test of time, even garnering the endorsement of Warren Buffett, one of the world’s most successful long-term investors. Buffett, in turn, learned this strategy from Benjamin Graham, who was the first ever to describe it in his 1949 investment classic, The Intelligent Investor.

The strategy is dollar-cost averaging (DCA). DCA bypasses investment concepts such as value, growth, and market timing, replacing them all with a single approach: discipline. It involves investing set amounts at regular intervals, usually monthly or quarterly. In contrast to a large one-off investment, this method reduces the impact of both long-term market cycles and short-term volatility. When share prices drop, the periodic fixed investment acquires more shares, and less when they’re rising, thereby reducing average cost and preserving liquidity.

The best thing about DCA is that it neutralizes emotion and bias, above all. Indeed, if discipline is maintained, investors won’t be panicked into selling when prices drop. Instead, they will automatically seize the opportunity to accumulate more shares at lower prices.

Real-world Application of DCA: Swiss Stock Market Analysis

Simply put, DCA eliminates the need to time the market – an endeavor deemed “both impossible and stupid” by Buffett. The record supports this claim. Over the past 20 years, those trying to time purchases in Swiss equities could have missed the best days and ended nearly 78% worse off than if they had simply stayed invested*.

* The calculations were made using the SIX – Swiss Market Index (SMI) as the Swiss stock market.

In bear markets, DCA can significantly reduce losses or even eliminate them altogether. For instance, if investors committed a lump sum of CHF 20’000 to the Swiss market after it had already dropped by 20% – assuming it hit the bottom – during the Global Financial Crisis (2007-08), they would have lost nearly 22% after 20 months. However, had they invested CHF 1’000 monthly over the same period, the loss would have been a mere 0.34%. Moreover, they would have picked up more stock at a lower average cost compared to a one-off CHF 20’000 investment.

In a bull market, such as the one which has prevailed in Switzerland from early 2000 to the current day, a single investment of CHF 20’000 in the SMI, at the beginning of any month over the period, carried a significant risk of losing over 20% of its initial value. The odds of experiencing a portfolio loss exceeding 20% gradually increase in line with the number of years one stays invested, reaching a peak of nearly 22% over 3 years, before notably diminishing to as little as 3.07% over 10 years.

That said, DCA significantly outperforms the lump-sum method, especially over the long term. The likelihood of experiencing the same percentage of loss in the total portfolio value is substantially lower across the board, whether it's over 1 year or 9. Committing a pre-set amount at regular intervals reduces the probability of losing more than one-fifth of the portfolio value by an average factor of 4.07.

Moonshot destroys the barrier & draws the next chapter of private market investing

One of Moonshot’s aims has always been to resolve this lack of opportunity. In this respect, we have cultivated relationships with a worldwide selection of carefully vetted private companies, granting our members the opportunity to invest in promising new technologies and products long before they go public.

This year, we are taking another giant step by introducing an opportunity for private investors to use DCA to reap the growth of private markets with a minimum monthly commitment of just CHF 300. This stands in stark contrast to our previous minimum investment requirement of CHF 10’000, making us the first in Switzerland to enable a cost-effective DCA in the private domain with that low entry ticket.

The triumph of dollar-cost averaging in the private market domain

At Moonshot, we conducted back-testing to see how well the idea could work. Taking the same downturn period as that for the public-markets analysis, we found that a single USD 20’000 investment**, made after the Private Equity Total Return Index (PRIVEXPD) had dropped by 20%, would have lost almost half of its value after just 20 months. In contrast, a monthly commitment of USD 1’000 over the same period would have yielded a small gain, while almost doubling the investor’s holding compared to the former approach.

** The calculations are denominated in USD, as the referenced index exclusively trades in this currency. The adoption of USD as the reference currency obviates the necessity to adjust for fluctuating exchange rates against the Swiss Franc (CHF) across multiple monthly intervals, thereby facilitating precise evaluation.

The bull-market analysis echoed that of public markets, although the results have been even more remarkable. While the likelihood of experiencing a loss exceeding 20% of the invested capital within a one or two-year timeframe – although miserable in contrast to public market results – stands at 6.29% and 0.64%, respectively, the utilization of dollar-cost averaging completely eliminates this risk.

In the long run, the potential of the private market is proving to be exceptional, with DCA effectively reducing the risk of an initial investment losing greater than one-fifth of its value to zero in the short term.

Chance of losing money being invested one-off vs. with DCA in PRIVEXPD for a number of years (period examined: from Jan. 2009 to Jan. 2024)

Final thoughts: The golden-ticket opportunity for cost-effective DCA

Our comprehensive analysis of implementing dollar-cost averaging across both public and private markets underscores the enduring effectiveness of the strategy highly praised by Warren Buffett. Founded on discipline rather than intuition and guesswork, DCA represents a strategy that limits the risk, hours of research, and near-constant worry that beset the market-timer.

In public markets, DCA consistently outperformed lump-sum investments in any scenario: mitigating losses and potentially fostering profits during downturns (21.25% higher returns) while offering the ultimate protection against market volatility over the long term (on average, a 2.56x reduced chance of losing more than 20% in value). The contrast against the 'bet-and-hold' approach in private markets is even more striking, with DCA boasting a remarkable 1.96x outperformance and 50.39% higher returns.

Moonshot's initiative to lower the minimum entry threshold to CHF 300 per month to enable DCA in private markets empowers individuals to navigate short-term market fluctuations with confidence and precision. With Moonshot, no longer will investors have to leave the private-markets cream for the big cats. Individuals now have a chance to join that hitherto-exclusive club of investors, all while avoiding the anxiety, effort, time, and, above all, the substantial financial commitments that have barred them from starting for so long.

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