“When everyone is scared you should be excited, and when everyone is excited you should be scared” Warren Buffet.
The share market has been on a wild ride lately, which has provided a wake-up call for investors who rode the six-year bull market and its low volatility without a care in the world. Now reality has set in. As with all market corrections, retail investors are questioning whether it’s time to pull money out, shift to safer and more stable investments or stick to their portfolios.
The key is to view the volatility that we experienced last August and what we are seeing now, as a tool to keep contributing regularly to your investments. This will let you maximize the possible potential for your investments and enable you to watch them grow. Rebalancing and investing using dollar cost averaging can help investors stay active and keep their long-term goals on track.
Dollar-cost averaging is the process of spreading out the costs of your investments as the market rises and falls, rather than purchasing shares all at one (potentially higher) price. The key is to pick a schedule whether it’s monthly, bimonthly or weekly and an amount, no matter how small, and stick to it by purchasing as many additional shares in your investments as your fixed amount will allow. This is much more effective than trying to “time” the market by buying shares when they are at their lowest or selling when they are at their highest.
Using this system, you are regularly contributing the same amount, regardless of the price of shares. As a result, that fixed dollar amount buys more shares in times when the market has dropped and prices are low, and it limits the amount of shares when the market has risen and prices are high. Over time you will come out ahead, compared with trying to time the market.
Dollar cost averaging is a long-term strategy requiring patience. Investors must make sure that they have the required capital for successive purchases as well as a discipline to pursue this strategy over a long period of time. The advantage of Dollar Cost Averaging strategy is a complete elimination of market assessment. The investor doesn’t have to predict the direction of interest rates, the dollar, world markets and the economy, i.e. is the economy going to go through periods of inflation, deflation, recession, depression, etc. Investors need only the discipline to mechanically keep on buying.
Just as important is investing broadly across the share market, and into a range of asset classes, and fund manager to further diversify risk. It is not about timing the market, but time in the market. The performance of your investment is not the same as the performance of your strategy.
This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial advisor before making any investment decisions
Michele Purvis is an advisor with over 30 years experience working in the accounting and financial services industry helping clients to define and create their wealth.