Reaching Your Financial Goals Through Regular Investing: Dollar Cost Averaging

Financial Spectrum - Sydney Financial Planners

There's a popular piece of investment jargon that describes a way of taking the guesswork out of successful investment timing.  It's called Dollar Cost Averaging.   In plain English, Dollar Cost Averaging means investing regularly, regardless of what the market is doing.  It's a way of making the value of your investment grow at the same time as removing the difficulty of "timing the market".  In the long run, investing on a regular basis also helps to reduce your overall risk.  

Market Timing for Optimal Wealth

Make no mistake, it's hard to time when to enter and exit markets.  Financial markets are made up of a host of different investors.  There are large institutions, such as fund managers, as well as companies, brokers and individual investors.  Over the long term, markets can do well but in the short term, prices fluctuate on the basis of fundamental news, market sentiment, expectations, rumour and competitor activity.  

Sometimes the "herd" mentality can be set in.  When the news about a particular stock is good, investors buy in. Even though the price keeps rising, buyers keep buying, as nobody is sure when the price has peaked. Similarly, when prices are falling, nervous investors sell in an attempt to cut their losses.  

There are statistical measures and yardsticks, such as price-earning ratios, which help determine the true value of a stock or bond, but as the boom and bust in Internet stocks has proven, rational measure are often ignored and sentiment can take over.  

Deciding when to invest in this environment can be a stressful task.  In the market is doing well you may fear that you're buying when prices are too high.  By contrast, when the market is falling, there is a reluctance to invest due to fears that it may fall further.  

So what should an investor do to avoid having to make these timing decisions?  

Why investing regularly works

Investing on a regular basis removes the stress of "timing the market" because you are employing the concept of "Dollar Cost Averaging".  This means that you buy more shares when prices are low and fewer shares when prices are high.  The trick to all this is to remember that it's not the price you pay for each share that matters.  It's the average price per share over time that determines your overall return.  

The key is dollar cost averaging, which, in simple terms, just means investing regularly.  For further information on how you can benefit from regular investing, talk to a Financial Spectrum professional financial adviser today 

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of Australia (FPA)