Dollar Cost Averaging – A sound investment strategy to help you stay invested for the long-term.

Dollar Cost Averaging – A long-term investment strategy to help you stay invested.

After witnessing the volatility in share prices over recent years, most people would be forgiven for choosing not to rush into the share market. However, historical records have proven that over the last 100 years that the average return for the Australian sharemarket has been greater than 11%.

During that time, our market witnessed many major set backs, including the Great Depression of the 1930s, several wars, the OPEC oil crisis and credit crunch of the 1970s, the share market crash of 1987 and the Global Financial Crisis 21 years later. But for every low, a recovery has been made.

What stops most people from investing in (or returning to) the share market is not knowing the best time to jump in. 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.

Averaging into the share market

A simple strategy investors can use to smooth out market volatility is known as ‘Dollar Cost Averaging’. This form of a savings plan involves putting aside funds on a regular basis to make investments into the market at regular intervals. This is a great strategy for people who don’t have a large sum of money to invest immediately but are able to build up an investment portfolio over time. The other advantage of investing this way is that it removes the decision-making process of trying to pick the cheapest time to invest (which is next to impossible). Instead, investing regularly in the market applies the concept of ‘dollar cost averaging’.

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.

For example

An investor John initially has $100,000 in savings and anticipates he will be able to save $5,000 every 3 months. During this time the share price rises and falls, which gives the overall result as follows:

Market MovementInvestmentShare PriceShares Purchased 
 
Initial$100,000$10.0010,000 
Share price in 3 months’ time$5,000$10.50476 
Share price falls in 6 months’ time$5,000$9.00555 
Share price rises in 9 months’ time$5,000$9.50526 
Share price as at 12 months’ time$5,000$10.00500 
Totals$120,000 12,057 

 

As can be seen in the table, John benefits despite the upward and downward fluctuations in the market. If he had invested the same total of $120,000 initially then he would have only received a total of 12,000 shares but with this strategy he gains an extra 57 shares due to market fluctuations.

 

 

Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

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