Whilst many people have been actively buying into the share market over the last few months, many others might be waiting for that perfect time.
But what if there is no perfect time, and even if there was, it would be difficult to time.
What if there was another way that you could get started, but manage the market timing risk?
What is dollar-cost averaging?
Similar to a regular savings plan, dollar-cost averaging simply involves investing an amount of money at set intervals over a certain period of time, irrespective of whether market prices are up or down.
You automatically buy more shares or units when prices are lower and fewer when prices are higher. Over the total period that you keep investing, your average entry cost will potentially be lower than the prevailing market price.
Yet, the main benefit of dollar-cost averaging is not so much the price paid for the investments; rather it is the adherence to a disciplined, non-emotional approach to investing that is not distracted by current market sentiment.
It’s particularly useful to help you focus on your long-term goals with an appropriately diversified portfolio while avoiding emotionally driven decisions to buy or sell – in other words, trying to time the markets.
Incremental investing is gaining popularity, especially through online platforms that enable you to invest automatically on a regular basis, and with minimal transaction costs.
The use of dollar-cost averaging does not necessarily mean investments will succeed, nor does it protect you from falling prices.
However, there is definite value in countering the emotion normally associated with investing by adopting a systematic incremental investment approach.
Dollar-cost averaging provides a straightforward way to steadily accumulate wealth without being overly concerned by market volatility.
If you have a long-term investment horizon with the discipline and resolve to keep investing, even during the most volatile investment periods as we’ve been experiencing, it’s a strategy worth exploring.
Note: Text edited and sourced from Vanguard Australia