Drawdown Dollar-Cost Averaging
Invest a fixed amount repeatedly so falling prices lower average entry cost
- Difficulty
- Easy
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 96%
Dollar-cost averaging commits the same amount of new money at regular intervals instead of making a fresh timing decision each month. When the chosen asset falls, the fixed contribution buys more units, lowering the average entry price across purchases. When prices recover, the investor can reach a portfolio high before the market itself returns to its prior peak because later purchases began from lower levels. The behavioral mechanism is equally important: the schedule limits opportunities for fear or excitement to interrupt the plan. In the episode, Raoul Pal describes adding during a crypto downturn and the guests agree that panic-driven overselling can create opportunity. This is not a guarantee of recovery. It works only if the investor has ongoing surplus cash, can withstand the volatility, and continues to believe the asset remains suitable.
Origin
Extracted from The Diary of a CEO
Core principles
- 01Fixed contributions buy more units when prices fall
- 02A schedule reduces repeated timing decisions
- 03Drawdowns can improve entry cost for a long-term buyer
- 04The method requires a suitable asset and a survivable horizon
How to run it
- 1
Choose the long-term holding
Define the researched asset or diversified fund and the reason it belongs in the portfolio. Write what evidence would invalidate that reason.
Watch out Repeated buying cannot rescue an asset whose underlying case has collapsed.
- 2
Set the contribution rule
Choose a fixed amount and recurring interval funded from genuine surplus cash. Keep essential reserves separate.
Pro tip Automate the transfer when cash flow is stable.
Watch out Do not use debt to maintain the schedule.
- 3
Continue through price declines
Follow the schedule during expected volatility so lower prices purchase more units. Avoid increasing the amount impulsively beyond the risk budget.
Pro tip Frame a planned decline as a lower acquisition price, not as proof to panic.
Watch out A falling price still represents real risk and may continue falling.
- 4
Monitor average cost and thesis
Review average purchase cost and the original investment case at planned intervals. Separate a thesis review from reacting to daily price movement.
- 5
Exit only by rule
Stop contributions if the thesis fails, the money is no longer long term, or the risk budget changes. Do not stop solely because volatility feels uncomfortable.
In the wild
Raoul Pal says he added as much as he could during the 2022 crypto down cycle. He attributes reaching a new portfolio high before the broader market to lowering his average entry cost through those purchases.
→ Regular buying at lower prices reduced his reported average cost.
An investor directs £200 into a broad index on the same day each month. During a decline the contribution buys more units, but the investor keeps emergency cash separate and reviews the fund rather than assuming every fall must recover. This is an illustrative application.
→ The investor follows a repeatable rule without trying to identify the market bottom.
Common mistakes
Averaging down without a thesis
A schedule should reduce timing emotion, not replace analysis of whether the holding remains suitable.
Using money needed soon
A long drawdown can force an investor to sell before the averaging process has time to work.
Is it for you?
Best for
It is best for investors with recurring surplus cash, a long horizon, and a researched asset they can hold through volatility.
Not ideal for
It is not ideal for emergency money, borrowed money, or an asset whose underlying case has failed.
From the transcript
“All you have to do is dollar cost average.”
“It lowers your average cost over time.”
From the episode
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