Over the last 100 years global share markets have experienced many major setbacks, including the Great Depression of the 1930s, several wars, the ‘crash of 1987’, and the Global Financial Crisis. But for every low, recovery has followed – they just take time.
What stops most people from investing in (or returning to) the share market is not knowing when to jump in, or how to ‘time the market’. Although nobody knows exactly when a market or a particular share price has found its base price, we can employ a strategy to remove this speculation and focus on a longer-term investment plan.
Using dollar cost averaging to grow your investment
You’ve probably heard of dollar cost averaging as a method to grow your investment portfolio.
Dollar cost averaging is simply investing a fixed amount at set intervals, so you buy more units/shares when the price is low and less when the price is high. Over time the costs average out and you usually end up with more assets than if you were attempting to ‘time the market’.
The aim of dollar cost averaging is that the average cost of the investments will always be below the average value of the investments during the period in question. It can certainly help you make the most of investment markets and economic conditions over the long term.
Other benefits of dollar cost averaging include:
- It encourages discipline – once you have committed to the principle of regular investment, you are more likely to accumulate a useful asset than a pocketful of good intentions.
It eliminates the need to decide when to invest – when it’s time to invest you do so regardless of what the market is doing.
As an example
Darren, a novice investor is able to save and invest $500 every three months over a year. During this time the share price rises and falls, which gives the overall result as follows:
| Market Movement | Value | No. Units | Cost | Average
Cost |
Average
Value |
| Share price after 3 months | $1.00 | 500 | $500 | $1.00 | $1.00 |
| Share price falls at 6 months | $0.75 | 666 | $500 | $0.86 | $0.88 |
| Share price rises at 9 months | $1.10 | 454 | $500 | $0.93 | $0.95 |
| Share price at 12 months | $1.40 | 357 | $500 | $0.95 | $1.06 |
| Totals | 1,977 | $2,000 | $1.01 |
As can be seen in the table, Darren benefits despite the upward and downward fluctuations in the market. The average cost of the units at the time of the last investment is $1.01 ($2,000 divided by 1977 units), yet the value of the shares at the end of the year is now $1.40.
Furthermore, dollar cost averaging can act as a form of diversification, enabling investors to stagger their entry into the market instead of taking the risk associated with making a large single purchase.
Dollar cost averaging doesn’t always provide the best outcome or generate a positive return. In a rising market, there will often be periods when it doesn’t pay off. In turbulent times, when markets are flat or declining, dollar cost averaging into a diversified managed fund may well be the sensible way to unearth those hidden bargains.
Talk to us if you would like to take advantage of building your wealth with dollar cost averaging.
Note: past performance is not an indicator of future results.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
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