Finding opportunity in volatile times

Russell Investments’ strategist team is expecting markets to be volatile throughout the remainder of 2016. This can be unnerving for investors because it can make things feel like they are out of their control. Helping clients to reframe this point of view and refocus their attention on the factors they can control can be both useful and rewarding.

Help clients focus on what they can control

Help clients refocus their attention on the variables they can control, such as their savings and spending behaviour. After all, the financial decisions your clients make today will impact their long-term savings.

A popular strategy during times of volatility is dollar-cost-averaging. Demonstrating this strategy to clients shows them how a little bit of additional savings can go a remarkably long way. And what better time to begin saving more than during times of market turbulence? In any other walk of life, a drop in prices is called a “sale” and attracts consumers. Why should it be any different in the realm of investing?

Dollar-cost-averaging in action

The hypothetical example below shows how dollar-cost-averaging can work. We'll feature a completely fictitious company called For Example.

Let's say an investor decided, with the help of her financial adviser, to dollar-cost average a $12,000 lump sum into For Example on the first business day of each month beginning in January.

Dollar-cost averaging $12,000 throughout the year into For Example Company

INVESTMENT DATE INVESTMENT AMOUNT SHARE PRICE SHARES PURCHASED
January $1,000 $10.00 100
February $1,000 $10.50 95.24
March $1,000 $11.00 90.91
April $1,000 $12.00 83.33
May $1,000 $9.50 105.26
June $1,000 $9.50 105.26
July $1,000 $10.00 100
August $1,000 $8.00 125
September $1,000 $7.50 133.33
October $1,000 $9.00 111.11
November $1,000 $8.50 117.65
December $1,000 $10.00 100
Totals: $12,000
(total investment)
$9.47
(average price/share)
1,267.09
(total shares purchased)

Dollar-cost averaging does not assure a profit or prevent loss in declining markets, and you should consider your ability to continue investing during low price levels.

Chart for illustrative purposes only, it does not reflect the performance of any actual investment.

Over the course of the year, $1,000 per month was invested for a total investment of $12,000. By dollar-cost averaging, the investor bought 1267.09 shares at an average cost of $9.47 per share, essentially smoothing out the up and down price swings.

The maths works out like this: $12,000 ÷ 1267 = $9.47

The bottom line

Volatility or not, decisions your clients make today can impact their savings in the future. When we allow uncertainty to derail disciplined financial plans, we run the risk of cheating ourselves out of a more secure future.

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