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One approach to entering investment markets is over an extended period of time – for example five or even ten years. Such an approach is called dollar cost averaging. Dollar cost averaging simply means investing the same fixed amount of money into the market on a regular basis, for example monthly or quarterly.
Using this approach only a portion of your investment portfolio is initially invested in growth assets - therefore, the impact of any short-term decline is far less. You minimise your loss.
Just as importantly, should markets decrease your regular contribution will result in the purchase of more units for the same dollar value. You buy more for the same price.
As growth assets such as shares outperform cash over the very long-term, a dollar cost averaging programme will on average deliver a lower rate of return over a 10-year period than the lump sum approach. However, this assumes people who invest a lump sum can withstand the yearly volatility, which can regularly exceed +/-20%. In practice, without the comfort of a dollar cost averaging programme, people are far more likely to exit the share market altogether. It may help you sleep better.
Overall, dollar cost averaging into growth assets over a prolonged period of time gives you the option of a halfway house between cash and growth.
While dollar cost averaging will not solve all clients’ investing concerns, it can go a long way to mitigate the volatility of growth assets. Clients who wish to re-enter growth markets but fear a repeat of weak returns, should also note that the period following a decade of weak share market returns has historically been the most rewarding.
There are a number of actions open to clients who wish to take advantage of the current period of weak growth asset returns. For those clients wishing to re-enter the market, a cautious long-term approach which sees them average in over five or ten years may be appropriate and can result in the generation of a gain even where the share market is flat during that period.
For those clients who are already fully invested and remain committed to holding their growth assets for the period required to generate an appropriate return, the use of a regular savings programme may significantly enhance their outcome. However small the contribution, such a programme can – over extended periods of time – make a material difference.
If you would like to discuss any of these programmes in further detail, please contact Mark Jones.
Phone Mark on 0800 404 202 or email us through our contact form