How to cope with market volatility
Even the most seasoned investors find it challenging to know when to put money to work in unpredictable financial markets. So, how do the professionals overcome this challenge? One of the most common strategies is called “dollar cost averaging”.
The basic principle behind dollar cost averaging is simple. It involves investing small amounts at regular intervals over a chosen period – rather than a single lump sum.
Dollar cost averaging essentially automates the investing process, to avoid buying at the wrong time. It means you’re not tempted to try and pick the low point in a share price (which is near impossible), and also avoid buying when prices are high. You might accumulate more stocks when share prices are low and fewer when prices are high, but you will keep on investing, which can give you a better result in the long run.
Compulsory superannuation is an example of dollar-cost averaging as your employer contributes 11% of your salary in regular instalments. It’s also a principle that can be used on your behalf in the construction of your Cornerstone portfolio.
Of course, dollar cost averaging cannot guarantee a profit or protect you against a loss in declining markets. However, it does reduce the odds that you will invest a large sum when the market has just hit a high point. Perhaps the best thing about dollar cost averaging is that it eliminates the typical emotions that can sway investment decisions.
The overall goal is to simply smooth out your investment over time. Work with your adviser to develop a good strategy – and stick with it.
Cornerstone Financial Group Pty Ltd is a wholly owned subsidiary of Invest Blue Pty Ltd (ABN 91 100 874 744) which is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327, Australian Financial Services Licence and Australian Credit Licence No. 232706.
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