What Is Accumulation?
In trading and investing, accumulation is the act of acquiring more of an asset over a period of time, usually across the course of multiple transactions. This buying activity could be performed by an individual, a fund, an institution, or the market as a whole.
The term accumulation can be used in reference to the addition of new positions in a portfolio or the incremental acquisition of a single position. It can also refer to the accumulation phase of an annuity or market cycle.
This can make it tricky to decipher exactly what is meant when you see the term.
However, you can generally think of accumulation as a synonym for buying activity (or a period of buying activity).
This begs the question, why not just use the phrase buying activity?
Manifestation of Demand
The basic concept of investing is simple.
Buy assets that you expect to increase in value. Sell them later at a higher price than you bought them for.
Through the laws of supply and demand, the buying activity itself is one of the fundamental things that leads to increased prices. As the demand for an asset increases, sellers can command more for it.
Thus, the accumulation of assets by individuals and institutions can create a positive feedback loop that leads to higher and higher prices. This presents both benefits and drawbacks for investors.
Higher prices means more value, which is good for investors. However, this also means that subsequent purchases will be more expensive. These later purchases may therefore have less room to grow than earlier ones.
Moreover, your transactions do not occur in isolation. The buying and selling activity of others also affects the price.
In response, traders and investors may implement different accumulation strategies.
Understanding Accumulation Strategies
The “right” way to acquire assets is largely dependent on the situation.
For some, singular purchases are best. For others, it is better to spread their buys out over multiple transactions. Some may benefit from a combination of the two.
Both options have their pros and cons.
How you should invest really comes down to your goals, risk tolerance, resources, and overall investment strategy.
Dollar-Cost Averaging
Dollar-cost averaging is one of the most popular forms of investing.
That is because it is both effective and easy to understand.
Buy assets you believe in at regular intervals and hold onto them for years (or decades).
This is one of the main principles behind retirement contributions. Every paycheck, you accumulate a little bit more in your 401(k) or IRA. 10, 20, or 30 years down the road, you cash out with significant gains on your original capital.
Hands-on investors often choose to dollar-cost average into an asset with proven historical performance, like the S&P 500. Or, they may instead choose an industry they believe in and accumulate more assets in that sector regularly.
Even as prices rise, each new purchase may be a good decision—as long as you choose the right asset and have a long enough time horizon.
Buying Dips
More seasoned investors may do things a little more strategically.
Whereas dollar-cost averaging typically involves uniform investments at consistent intervals, others may prefer to “buy the dip.”
As you probably already know, even the strongest assets fluctuate on their way to higher prices. Shorter-term downtrends are common during bull markets and smaller pullbacks are common during uptrends.
Traders (and some active investors) see temporary bearish price action as opportunities. So instead of investing all of their uncommitted capital, they elect to keep some “dry powder” in order to take advantage of such chances.
One of the best ways to do this is with layered limit orders. Not even technical analysis experts can predict with 100% certainty how low an asset’s price may fall during a retracement. Therefore, placing limit orders at multiple support levels is a good way to accumulate at a discounted price.
Of course, it’s not perfect. But it doesn’t have to be to be profitable.
Large Orders
For the “whales,” there are other reasons to spread out their asset accumulation.
Large orders can cause issues, particularly market orders. One of the main ones is slippage. When the selling side of the order book is too thin to accommodate a purchase at the current price, the order will continue to execute at increasing prices until the entire order is filled. This is especially common during periods of high volatility and lower-volume markets.
The result is a higher average price and consequently less potential profit. This is generally a bigger problem for traders than investors but is also relevant for large and/or institutional investors.
To combat this, traders can use several smaller orders spread out over a period of time. This dilutes the overall impact of large purchases. Furthermore, information is gained through each transaction.
While this tactic does not guarantee a lower average price, it may improve your chances.