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Are you a busy individual who wants to invest your money but doesn’t want to spend too much time doing it?
If so, the Price Cost Average (PCA) strategy may be the perfect solution for you.
This investment strategy can be mastered in just a few minutes, yet can bring profitable results for your long-term investment goals.
To understand the PCA strategy, you need to first understand the difference between investing and trading.
The Difference
Investing is a long-term approach to growing your overall wealth, whereas trading focuses on short-term gains.
Rushing into investments can lead to mistakes, so it’s important to be patient and wait for returns. However, it’s the investment strategies that help you build wealth, and the PCA strategy is one of the most effective.
Okay, let’s get to it!
Strategy #1
When we are investing we are actually buying a piece of a company.
It’s a physical asset known as a stock.
For instance, if you bought stock in Apple, you own that piece of Apple.
Now, before purchasing that stock in Apple, you need to ask yourself one very important question:
What are the chances of that asset going to zero?
In other words, will Apple go bust?
The answer of course is – highly unlikely!
But also you need to consider the growth potential of the company.
Does Apple have growth potential?
Of course, it does!
Some forecasts suggest Apple’s price will rise an astonishing 339% by 2030.
Strategy #2
The next approach people use is called the Price Cost Average (PCA) strategy.
You might also come across it as Dollar Cost Average (DCA).
PCA is an investment strategy that involves regularly investing a set amount of money into a particular asset.
Doing this helps reduce the effects of volatility on overall investment returns.
Basically:
- You buy more of that company’s stock when the price is low
- You buy fewer shares when the price is high
This means that over time, the average cost of purchasing that asset will be lower than the current market price.
By investing a fixed amount of money regularly, you are taking advantage of market movements.
At the same time, you are not being as affected by the price changes.
We use PCA as part of a long-term investment strategy.
It helps protect against short-term volatility.
Yet still achieves long-term investment goals.
The great thing is, it’s a highly effective strategy for those who have a busy life because it can take just 5 minutes a month!
You read that right – 5 minutes!
Hence, it can be mastered in minutes!
It’s also very successful.
It’s also incredibly useful for investors who are just starting out.
Or those who don’t have a lot of capital to invest.
But when using the PCA strategy, it’s important to have a well-diversified portfolio.
Because this helps to reduce risk.
Diversifying means investing in a range of different assets across different industries, sectors, and even countries.
Overall, PCA can be an effective investment strategy for those looking to build a long-term investment portfolio.
A lot of retail investors and even institutions use PCA.
But always do your research.
And seek professional advice before making any investment decisions.
More on the PCA Strategy
The other benefit of the PCA strategy is the fact it works hand-in-hand with compound interest.
Because the more you put into that particular investment, the more interest you will make.
But also that money added to the interest will be making more money too.
Ideally, you should be investing every month.
The PCA in action
A classic example of the PCA strategy in action is when an investor chooses, say the S&P 500, which relates to the 500 largest companies in the US.
The S&P 500 is known an Exchange Traded Fund (ETF).
These companies are generally ones that investors believe will not go to zero.
Plus they are companies that are believed to have great growth potential.
Typically an index like the S&P 500 grows 5% to 7% in a year.
How to Implement the PCA
- Choose an asset which cannot go to zero that also has the potential to grow.
- Decide how much money you are going to invest in the market.
Remember, you are aiming to invest the same amount no matter what the market is doing – i.e. whether it is up or down.
Never be tempted to put in less if the market is down or more if the market is up.
Here’s an example.
Let’s say you chose the first Monday of every single month to invest $100 into your chosen asset – Apple.
$100 for 12 months = $1200.
Now, the markets move every day, so you will have invested at low prices and at higher prices.
But this in effect, as you can see in this graph brings down your average cost.
It’s this average cost that is so crucial because this is what dictates how much money we could potentially make.
As you can see here by the end of the 12 months, you actually made money!
Typically, the PCA gets around 3% to 5% in a year, which is pretty good considering investing takes just five minutes a month.
Conclusion
Here at Investment Mastery, the PCA strategy is one of the dozens we present to our students during our workshops and video courses.
That’s because the PCA investment strategy really works!
And is ideal for individuals with very busy lives who want a proven method that doesn’t take a lot of time to implement each month.
If you wish to know more, subscribe to IM Insider for a full breakdown of what we do and how you can benefit from our investment coaching and mentoring with real, experienced, expert traders.
