To DCA or Not to DCA?
In my previous post, I talked about how the alternative asset markets are down but not dead. And when assets are down, it can bring up the question of dollar cost averaging (DCA).
Do you start buying more to lower your average unit cost?
That is a loaded question. There are a lot of variables that go in to the decision to DCA. And those variables will require some guesswork.
But talking about decision to DCA without any real examples feels useless. So I will use a real, but tiny, example from my portfolio.
DCA Decision Variables with Real Life Example
I own 4 shares of Meebit #15511 which is a NFT that is fractionalized on Rally Rd. Meebit #15511 was initially offered in December 2021 via 15,000 shares at $5 each for an opening market cap of $75,000.
My 4 shares have a total cost basis of $12.80 for an average cost of $3.20 per share. I bought my shares in late March/early April when it was already down a bit from the $5 opening. My average cost basis of $3.20 per share equates to a market cap of $48,000.
Currently, Meebit #15511 is trading on Rally Rd for $1.10 per share. That’s a market cap of $16,500.
So I’m down 65% here. My $12.80 investment is now valued at $4.40.
Here are some of the factors I’m considering when it comes to dollar cost averaging:
Will the asset valuation go back up to my cost basis without doing anything? That would allow me to breakeven on exit without having to put any more money at risk. This would be a win as sometimes just avoiding the loss is a win in itself.
Personally, I don’t see Meebit #15511 going back up to $48,000 anytime soon.
Can you lower your average cost basis to a point that you believe is recoverable? I might be able to here.
If I buy 11 more shares at $1.10, my new average cost will be $1.66. That would allow me to breakeven at a market cap of $24,900.
That reduces my average cost and the market cap I need to breakeven by almost 50%!
If I buy 20 more shares at $1.10, my new average cost will be $1.45. This would reduce my breakeven point to $21,750.
Do I think Meebit #15511 can recover to $21,750? Maybe yeah, that’s about a 30% increase from the current value. That seems a lot more likely than going back to $48,000 which is more like a 300% increase.
Am I throwing away good money after bad by buying more? I’m down 65%. The asset is down 78% from it’s IPO. But it can still drop another 90% and then another 90% again. A lot of people think NFTs are going to zero. The sunk costs are gone, am I just wasting money if I buy more? It’s easy to get hurt trying to catch a falling knife.
Do I have other gains that could be offset by the loss here? If so, I should time the sale of my losing asset to help if offset taxable gains on another asset. In this case, no I don’t have other gains that could be offset. And if I did, an $8 loss here wouldn’t help that much. But in other cases, selling for a loss can really help out taxes.
So those are some of the things that need to be considering when deciding on dollar cost averaging. As you can see, it’s not so simple in practice.
That’s it for now.
Stay rad. 😎