‘Whiplash’ is a great way to describe what investors are facing right now. The share market is down 6 per cent one day and up 1.5 per cent the next - it might not seem like much but we’re talking about billions of dollars added or subtracted from one day to the next.
Recently, Australia’s share market suffered seven consecutive weeks of losses, the longest losing streak since the credit crackup hit in 2008. And this volatility affects us all - don’t forget that having superannuation means you’re invested in at least a part of the share market.
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But it doesn’t need to be all doom and gloom - it is possible to turn this volatility into an opportunity. Investing experts use a tried-and-tested strategy called dollar cost averaging.
What is dollar cost averaging?
If you’ve been on any kind of roller coaster, and not the sharemarket kind, you’ll know it can feel like your stomach is dropping out from under you. According to professional traders, this is the psychological danger.
Instead of shying away from what we’d consider a scary dip in the market, they say “buy”. But the time-honoured technique doesn’t just suggest you buy when you think the market is low, and sell when you think it’s high. Because anyone can get those market timings wrong, even professional traders.
The safer and more conservative strategy is to regularly invest a set amount, come what may.
How regular investment ratchets up returns
What you want is to invest the same amount of money at the same intervals in your target market or sector or company. The key is that you do this regardless of price. In fact, don’t even look at what the market has done that day. Automated trading is an excellent tool here.
The outcome of investing in this way is that you can lower your average cost per share as well as minimise the impact of price volatility. Think about it: when the market is low, you get more shares at a cheaper price. Then when it, probably inevitably, rises, your higher number of shares gives your portfolio a comparatively bigger boost. Equally, when you’ve bought shares high and the price falls, there are fewer shares to lose money.
In a nutshell, you buy more shares at lower prices and fewer at higher ones. See how savvy it is?
The strategy’s ‘super’ boost
Earlier, I mentioned your superannuation. Without doing a thing, your super means you are reaping the rewards of dollar cost averaging. Your employer is obliged to pay 10.5 per cent of your salary into your super fund, at least quarterly.
Right now you are getting more units or shares while the price is lower. The other thing to note about super, in case it has been stressing you out, is that in it you will hold assets other than shares. A so-called balanced portfolio, that you’ll have if you haven’t selected a fund split, only has around 70 per cent invested in growth assets.
That gives you an added layer of protection against volatility - your portfolio would be supported by more stable investments such as fixed interest or cash holdings. In fact, with the S&P/ASX 200 cheaper than it has been for six months, it could even be the time to contribute extra into your super fund.