Up, down; good, bad.
We have been watching the Australian All Ordinaries Index increase 1-2% one day and fall the same amount the next.
One day the experts are singing the praises of our leading companies and the next they are shouting their shortcomings. With such missed messages the average investor is understandably confused.
Should we invest? Or should we get out of the market until the storm subsides?
There is a way to ride out the storm. During volatile times you should seriously think about dollar-cost averaging. This involves investing a set amount, say $2,000, in shares, managed funds or securities at regular intervals (for example monthly).
When markets are volatile investors feel compelled to take action – to do something with their investments. When they drop we feel the time is right to buy. But what if they continue to fall? What will happen to your portfolio? Did you jump in and buy too early? Should you have waited?
It’s in times such as these that dollar-cost averaging can help.
Theoretically, if you buy shares each month for a year, then the average price of those shares should be about the mid-point of the 52-week high and 52-week low. This is not always the case because there can be peaks and troughs throughout the year and the market doesn’t rise or fall in a straight line.
Nonetheless, by investing $2,000 a month you will have bought shares at somewhere near the average year price – not at the lowest price – but not at the highest price either. If you invested the $24,000 in one go you might have bought at the low point or the high point or somewhere in between.
Dollar-cost averaging reduces the risk of investing all your $24,000 now, only to see the market fall. However, if you feel the market is at or near its lowest point, it would be best to invest your entire $24,000 now. Just remember – your timing may not be right. This dollar averaging strategy tends to help people who want to invest in shares or managed funds over the long term but are concerned that in the short term there may be volatility. History shows that in the long term the market will rise.
The key advantages of dollar cost averaging are:
- it encourages forced and regular investment
- it eliminates procrastination
- over the long term, the share and property markets have out-performed cash
- it reduces the risk of investing all your money at the top of the investment cycle
Should you require more information regarding Investing and share trading, please submit an online enquiry now or call Peter Quinn on +61 2 9580 9166. We also offer a FREE 45-minute consultation should you have other financial planning, taxation or superannuation issues you may wish to discuss.
The information in this document does not take into account your personal objectives, financial situation or needs, and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.