We caught up with Kiwibank Chief Economist — Zoe Wallis who explains dollar-cost averaging and the benefits of this type of investing. Here’s Zoe…
At the moment, the share market appears to be going swimmingly. Stock prices are hitting new record high after record high. But can this keep going?
Eventually, the party may come to an end, and we could experience a fall in stock prices. If it does should you panic!?… Nope!
With a well-diversified portfolio, often a fall in prices (also known as an equity market correction) can be an opportunity to shop at Karen Walker and pay Warehouse prices!
Getting a ‘good price’
But how do you know when shares are expensive or cheap? Often it’s really hard to tell until after the fact. And even the pros can end up getting their timing wrong. This is where dollar cost averaging comes in.
Dollar-cost averaging is when you choose to invest a certain amount on a particular investment regularly, regardless of what the price is. This means when prices are high you will end up with fewer shares, but when prices are low you will end up with more.
This is an investment technique that aims to average out the amount you spend on shares over time, rather than catching the market at a specific high or low point.
Say I'm interested in buying some shares in the NZ Top 50 fund. They might cost me $2.40 per unit today, $2.50 next month, and $2.20 the month after that. If I invested $100 each month I'd have 127.12 units with an average price of $2.36 per unit.
If I purchase all $300 worth at today's price of $2.40, then I would only have 125 units.
While that doesn’t sound like that much, if we extrapolate that out over bigger amounts and over your whole investing life, it can add up quite quickly. Not to mention the added stress of wondering whether you’ve just bought everything at the very top of the market (or sold everything at the bottom)!
Averaging-in can be a really handy way to avoid the ups and downs of financial markets and is a technique every investor should consider using. Auto-investing through Sharesies is a really simple way to put dollar-cost averaging into practice.
This means you can make regular purchases of small amounts whenever you like and start getting some runs on the board, rather than having to save up until you have larger amounts to invest.
A regular investor. Returns shown are a real life example as at November 16, 2017, and aren’t guaranteed. Your investments can go up and down at any time.
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written.