Wouldn’t it be great if you could always buy shares at bargain prices? Or if you knew when the best time to buy was?
Timing the share market is difficult to do - not even experts can predict correctly all of the time.
So, what can you do to make sure you reduce your risk, and avoid the stress of market ups and downs?
It’s called dollar-cost averaging.
What is dollar-cost averaging?
It’s an investment strategy where you invest a fixed amount, regularly, no matter what the prices are and what the financial markets are doing. Sometimes you’ll buy these shares at a higher price, and your money will buy fewer shares. Sometimes you’ll buy at a lower price, and your money will buy more shares than expected. The price depends on what’s happening in the market at the time you invest your money. The idea is that over the long term, the price will average out.
(Note, it’s still a good idea to keep an occasional eye on the price you’re paying - a company that continues to fall may be a red flag!)
If you invest in KiwiSaver, you already use this strategy. If you’re employed, every month your contribution, then your employer contribution, is added to your KiwiSaver account. The amount is the same every month.
You’ll help reduce stress
When you’re buying shares, it can be stressful wondering when the right time to buy is. Are you buying at the top of the market or the bottom?
One of our favourite investment sayings is, “It’s time in the market, not timing the market”. This means set up your investments to be ‘set and forget’. Put money in regularly, and don’t be stressed about what the market’s doing.
It’s great for lump sum amounts
Say you have a cash windfall, and you want to invest a large sum of money. Rather than invest it all at the same time, many experts suggest “averaging in” to the market, to reduce your risk. This means you could deposit $1,000 once a fortnight into your investments, rather than, say, $6,000 all at the same time.
Dollar-cost averaging can be a great way to even out your investment returns, without worrying too much about what’s going on in the financial markets!
Published 28 May 2020
Pie Funds Management Limited is the issuer of the JUNO KiwiSaver Scheme. You can read our Product Disclosure Statement. This article is general in nature only and has not taken into account any particular person’s objectives or circumstances. We recommend you speak with an independent financial adviser. All content is correct at time of publication date.