There may be some concern around global markets currently with the turbulence going on in geopolitics, commodity markets etc. Often investors see volatile market conditions such as these as a threat and cause for concern, when more often than not, they should instead be viewed as an opportunity to acquire additional investments at lower prices while others are ‘fearful’.
As Warren Buffett so aptly put it “Be fearful when others are greedy. Be greedy when others are fearful”.
An approach to investing that aligns quite closely with this famous quote is known as
Dollar-Cost Averaging.
Dollar-cost averaging is an investment strategy in which an investor regularly invests a set amount (or divides up the total amount to be invested across periodic purchases) to reduce the impact of market volatility. It is a strategy an investor can use to potentially build wealth over the long-term and is well suited to neutralising short-term volatility in the broader market.
Under this method, the purchases occur regardless of the asset’s current price and at regular intervals and in effect, this strategy removes much of the risks of attempting to time the market and disciplines the investment process. In essence, when other market participants are ‘greedy’ and investments appear overpriced, your same monthly purchase will buy relatively less investment units but when other market participants are fearful and prices are depressed, your same monthly purchase will buy relatively more investment units. This helps immensely in removing emotion and helps to instil a level of discipline in the long-term investment process.
The easiest way to implement a strategy like this is as simple as setting up a monthly debit order to regularly contribute funds into your investment portfolios. This not only ensures that you are consistently investing irrespective of the ebbs and flows of market cycles but also affords you the peace of mind that comes with not constantly watching the market in an effort to perfectly time the purchase of investments.
As any investor will know, nothing is certain in investment markets but often removing emotion from the equation can be a good starting point in any investment plan and applying the principals of Dollar Cost Averaging will ensure that you are consistently investing irrespective of how fearful or greedy other market participants become and will potentially put you in a better position to earn returns in the long term.
If you’d like to explore this further and discuss how best you can position your finances and investments for the future please feel free to reach out to me via email – Jordan@lfwealth.co.za
