Key Takeaways
- HealthTech investing offers an opportunity to capitalize on the growth of transformative healthcare innovations.
- The dynamic nature of the HealthTech sector often raises questions about the best approach to start investing.
- Dollar-cost averaging is a well-known strategy to help mitigate risk while staying consistent.
What Is Dollar-Cost Averaging?
According to Charles Schwab, Dollar-Cost Averaging (DCA) involves making consistent investments of a fixed dollar amount at regular intervals irrespective of the asset’s price. This approach contrasts with lump-sum investing, where a significant amount is deployed at once. The key advantage of DCA lies in its ability to smooth out market fluctuations, allowing investors to buy more shares when prices are low and fewer when prices are high.
For instance, consider an investor committing $1,000 monthly to a healthtech fund. If the fund’s price drops significantly in a given month, the fixed investment will buy a larger number of shares, effectively lowering the average cost per share over time. By adhering to this strategy, investors can avoid the pitfalls of emotional decision-making, such as panic selling during downturns or overconfidence during rallies.
A DCA-based investing strategy can help investors remain disciplined, reduce anxiety about market timing, and build confidence in their investment plans. These benefits are especially valuable for novice investors, those venturing into volatile sectors, or those entering sectors that are new for their portfolios.
Why Use DCA to Invest in HealthTech?
The healthtech industry is characterized by rapid innovation. However, there can be some market volatility due to uncertainties like regulatory changes, technological disruptions, or longer adoption cycles. A DCA strategy offers several advantages for this unique sector.
1. Managing Market Volatility
The healthtech sector frequently experiences price changes due to emerging technologies and shifting market sentiment. For example, the announcement of a breakthrough medical device can drive up fund prices, while regulatory challenges might lead to sharp declines.
DCA allows investors to maintain a steady course, reducing the emotional stress associated with market turbulence. By focusing on consistent investments, investors can benefit from long-term trends without being derailed by short-term noise.
2. Encouraging Long-Term Investment Discipline
While trying to time the market can help generate some higher returns, long-term investing strategies can maximize portfolio growth overall. According to FINRA, DCA instills a habit of regular investing, which is particularly beneficial in sectors where rapid innovation can lead to speculative bubbles. Instead of attempting to predict market highs and lows, DCA encourages investors to start investing and stay invested, taking advantage of compounding returns over time.
3. Reducing the Risk of Poor Timing
Market timing is notoriously difficult, even for seasoned investors. If you’ve heard of the Warren Buffet example, his “set it and forget it” method yielded more returns than investors working diligently to predict market trends!
DCA works well as a “set it and forget it” pathway, minimizing the risks associated with poor timing by spreading investments across various market conditions. This approach ensures that investors avoid the regret of having allocated a significant sum just before a downturn, or missing out on dips in the market.
4. Buy & Hold
DCA works best as a long-term investing strategy where, as mentioned above, shares are purchased at consistent intervals regardless of price. However, to truly see the benefits in your portfolio returns, this strategy requires also holding on to those shares regardless of market volatility.
Over time then, buying and holding at varying share prices will result in a cost basis that is favorable to the investor.
The Mechanics of DCA: A Hypothetical Example
To illustrate the benefits of DCA, consider an investor contributing $500 each month to a healthtech exchange-traded fund (ETF) over six months. Table 1 depicts ETF price variation and corresponding shares bought with a $500 investment.
In total, the investor contributes $3,000 and acquires 61.03 shares. The average cost per share is $49.15, compared to the simple average price of $50. This demonstrates DCA’s ability to reduce the average cost basis in volatile markets.
Moreover, this example highlights how DCA automatically capitalizes on market dips by allocating more capital to shares when prices are low. This contrasts with lump-sum investing, where the purchase price depends entirely on the timing of the initial investment.
Considerations & Limitations of the DCA Strategy
While DCA offers compelling benefits, it is not without drawbacks:
- Opportunity Cost: In consistently rising markets, a lump-sum investment may outperform DCA. It’s important for investors to assess market trends and their risk tolerance before committing.
- Transaction Costs: Frequent purchases can result in higher transaction fees. Consider choosing low-cost brokers to optimize returns.
- Patience Required: DCA works best for long-term goals and may not suit investors seeking immediate gains.
Why DCA & HealthTech Work Well Together
Healthcare technology is considered to be the future of healthcare. With artificial intelligence rapidly making its way through the industry as well, it’s a matter of time before healthtech becomes the standard of care in many areas of healthcare.
As we also witnessed during the pandemic, healthcare, and healthtech, are counter-cyclical. In other words, the industry is resistant to the ups and downs that drive other areas of our economy. For instance, in tough times, people will cut back on spending to save money, often reducing expenditures on vacations, luxury items, eating out, etc. However, healthcare is a basic human necessity that can’t be reduced. The consistent demand for healthcare keeps companies, like those in healthtech, relevant and profitable.
Regarding the HealthTech subsector specifically:
- Stable Demand: Hospitals still need innovative tools, software, and devices to improve patient care and cut costs, regardless of whether the stock market is up or down.
- Aging Population: With more people aging and needing healthcare, especially in developed economies, HealthTech solutions become even more critical. This demographic trend doesn’t stop for a recession.
- Efficiency Focus: During economic slowdowns, healthcare providers often look for cost-saving technologies, like HealthTech solutions, that make operations more efficient.
While industries like retail or real estate might struggle during downturns, HealthTech offers a safe haven because healthcare is a priority no matter what. The healthtech sector, then, represents a unique opportunity for investors.
Because of the growth potential and inherent risks of the industry (regulatory hurdles and slow consumer adoption), DCA aligns well as an investment strategy, enabling investors to build exposure incrementally while avoiding overexposure to short-term volatility.
DCA also allows investors to participate in long-term trends like the increasing adoption of telemedicine, AI integration in diagnostics, and advancements in personalized medicine. By staying consistent, investors can position themselves to benefit from the sector’s exponential growth without succumbing to the temptation of speculative trading.
As with any new investment, it’s important to perform due diligence and make the best decision for your portfolios.
Final Thoughts
Dollar-cost averaging is an effective investment strategy that offers stability and discipline in the face of market volatility. For investors in healthtech, this approach provides a structured way to participate in one of the most dynamic sectors of the global economy.
While DCA may not maximize returns in every scenario, its ability to reduce timing risks and foster consistent investing makes it a cornerstone strategy for long-term wealth building. By adopting DCA, you can confidently navigate the challenges of healthtech investing while positioning yourself for success in this transformative industry.
(As always, any investment strategy should be tailored to your specific financial goals and risk tolerance.)
Rida Zaneb
Rida is currently pursuing her B.A. in Mathematics and English at Kenyon College. She is deeply interested in the intersection between technological innovation and human connection.
