Markets don’t like uncertainty. Uncertainty creates market volatility. Market volatility causes uneasiness in investors. Investor uneasiness presents itself as fear. Fear makes investors do things they would not normally do such as jumping ship or remaining paralyzed on the sidelines. Emotions can take over causing investors to struggle to stay the course.
Now let’s rephrase that to look at the same situation a different way.
Uncertainty creates market volatility. Market volatility creates opportunities for investors. Market drops represent times when investments can be purchased at discounted unit prices. Market valleys give us a chance to buy something cheaper than it was before. Dollar-cost averaging (investing a set amount of money at regular intervals) can be an ideal investment strategy in uncertain times. Market volatility paired with dollar-cost averaging means investor opportunities.
Sometimes when we focus too much on what frightens us, we fail to see the opportunities.
There is no question of the uncertainty in our world these days. Amidst a global pandemic and public health crisis, controversial US presidential election and race to develop and distribute a vaccine; we indeed have much uneasiness around us.
As humans we have a response to this uncertainty, and the financial markets do too.
It can be hard to look at investment balances as financial markets swing, but if you can set your fear aside you will see the opportunity. Experts agree trying to time the market is a bad idea that seldom works and often adds to investor stress and losses. Conversely, a straightforward long-term strategy to navigate the ups and the downs in the market provides a calculated and profitable approach. Dollar-cost averaging fits the bill. It works well in all markets but works best in volatile markets.
Dollar-cost averaging, it’s your time to shine
A dollar-cost averaging strategy uses a disciplined approach to invest regular amounts at regular intervals. (i.e. $100/week for example) As a result of daily market movement each time you invest you are purchasing your investment at a different unit price. It also means you are purchasing a different volume of units each time. When the market dips, you have the benefit of purchasing more units at lower prices. In doing so, you will benefit when the markets start to rise again.
Purchasing at regular intervals allows the investor to have a strategic process in place to take advantage of these opportunities as they come along.
A simplified example of investing $100/week into a hypothetical investment fund can illustrate how this works. (Illustration courtesy of CI Investments, Dollar-cost averaging)
Dollar-cost averaging at work
Average of share prices: $8.67
Average cost per share: $8.26 ($600/72.6)
Dollar-cost averaging lowers the cost per unit of your investment and provides potential for higher capital appreciation assuming the market is moving in both directions.
To the dollar cost averaging investor, it really doesn’t matter how the market moves up and down along their investment journey at any given point in time, so much as the long term upward trend with multiple dips to boost buying opportunities along the way. Purchasing at regular intervals allows the investor to have a strategic process in place to take advantage of these opportunities as they come along.
Perspective remains key. If time is on your side, don’t stand on the sidelines afraid to make a move. Set fear aside and let a dollar-cost averaging investment strategy guide you to opportunities for long term growth.
Column appeared in This Month In Elgin December 2020 issue
Stephanie Farrow, BA., CFP., Stephanie has over 26 years' experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial column for local business magazine Elgin This Month/This Month in Elgin since 2010. Stephanie and her husband own Farrow Financial Services Inc. About our Farrow Financial Team.
Photo credit Pixabay: Image by Melanie Schamboeck