The recent volatility and downward movement of world share markets has caused most Australians to see a decline in the value (on paper) of their superannuation and other share oriented investments. The media is filled with doom and gloom and it can all seem a little scary.
Dollar cost averaging can be an effective way of managing risk when investing in assets such as shares.
When looking at investing in shares or managed funds, the thought of your investment crashing in value can be quite off putting, especially if you’ve got a sizeable lump sum on your hands ready to invest. Dollar cost averaging is a method that can be suitable for investors to reduce their risk of seeing their investment slump in value.
Instead of investing all of your capital in one go, the idea is that you invest smaller, fixed amounts on a regular basis over an extended period of time.
For example, instead of investing $10,000 in one transaction, you could invest $2,000 per month over five months. The price of the shares or other asset you’re buying will go up and down over that period, but you always invest the same amount. What happens is that you end up buying more of the asset when the price falls in any given month, and fewer units if the price is higher.
Dollar cost averaging takes away some of the risk of putting a lump sum into an investment and then seeing it immediately fall in value.
Let’s use the ‘$10,000 over five months’ example – say an investor wants to put money in XYZ Compoany, but its share price has been rather up and down lately (sound familiar?). The investor decides to make use of dollar cost averaging over a five month period, investing $2,000 every month regardless of the share price. This is how it goes for the investor:
So over the 5 month period there were 1,555 shares purchased at an average share price of $6.60 – meaning $10,000 was invested and the value is $10,263. If the $10,000 was invested in one lump sum in Month 1, the value would now only be $8,750 due to the decrease in the share price.
By sticking to a regular investment strategy during a fluctuating market, the investor ended up generating a larger return than if the full $10,000 was invested in one go. This is why some investors view dollar cost averaging as a less risky way of investing, because it spreads the cost of investing across a time period that you choose.
Keep in mind, however, that dollar cost averaging is not a risk-free strategy. Sometimes you’ll end up with a lower return than you would have if you’d invested your entire lump sum in one go, such as when the market is steadily rising over time.
Would you like to understand this investment strategy more? Give the team at Steve May a call and start a conversation today.
You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Futuro Financial Services Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website
Steve May, Luke Styles and May Wealth Pty Ltd T/A Steve May Financial Services are Authorised Representatives / Corporate Authorised Representative of Futuro Financial Services Pty Ltd ABN 30 085 870 015, Australian Financial Services Licensee, Licence number 238478. Please refer to our website at www.stevemayfs.com.au to reference our Financial Services Guide and business/adviser profiles.
May Wealth Pty Ltd ABN 71 612 234 518 trading as Steve May Financial Services is a Corporate Authorised representative of Futuro Financial Services Pty Ltd ABN 30 085 870 015, Australian Financial Services Licensee, Licence number 238478.
Steve May and Luke Styles are Authorised Representative’s of Futuro Financial Services Pty Ltd ABN 30 085 870 015, Australian Financial Services Licensee, Licence number 238478