So you have a lump sum to invest. What now? Do you invest it all at once or bit by bit?
Will inflation, interest rates and further supply chain disruption fuel market volatility this year and impact on your lump sum?
Fear and worry are understandable, but trying to second-guess the impact of events, or even attempting to make a bet on them, rarely pays off and understandably can deter some people from investing.
Dollar Cost averaging (or Franc cost averaging) involves investing a fixed amount of money at regular intervals, regardless of the market’s performance.
This means that, if you have 800’000, you would invest, for example, 80’000 a month for 10-months. Yes, even if the market is falling!
What this approach ensures is that you buy more shares when prices are low and fewer shares when prices are high. The aim is to lower your average ‘cost per share’ over time and smooth your returns by reducing the risk of buying on the ‘wrong’ day.
Investing regularly is a highly effective way to benefit from Dollar cost averaging, but also instils good habits for saving and investing.
This comes from either the manual process of investing each month, or the far easier automation of your investments via a Standing Order or instruction.
Investment professionals often say that the secret of good portfolio management is a simple one – market timing.
Namely, this means buying more on the days when the market goes down, and to sell on the days when the market rises.
As an individual investor, it is likely that you may find it more difficult to make money through market timing in quite the same way.
Historically, the overall direction of developed stock markets has been a continual rise in value over the very long term, punctuated by falls.
It is important not to let current global uncertainties affect your financial planning for the years ahead.
If you do stop or pause your investment planning, particularly during market downturns when people tend to panic, you can often miss out on opportunities to invest at lower prices.
Actually, yes. Even if you have you have already invested your lump sum, Dollar cost averaging can be useful for you.
Dollar cost averaging can be used by those with an established portfolio to build exposure a little at a time to certain areas, whether that be more high risk or any sectors you wish to explore further.
Please note that all content within this article has been prepared for information purposes only. This article does not constitute financial, legal or tax advice.