People often joke about the weather in Cape Town, saying that you can experience all four seasons in one day. And, if you speak to a local, you’ll know that regardless of how warm it is, they’ll always pack a sweater in case the weather turns. Still, as a top tourist destination, the weather doesn’t deter intrepid travellers; they keep returning. Investing in the markets is exactly the same; despite the ups and downs, sometimes, in a matter of hours, investors keep returning.
For the unseasoned investor, the temptation to dump windfalls into an investment account or market allocation could cost them in the long run. This is because the fluctuations in market prices mean that you never really know if you’re buying at a high or a low in the market. The highs and lows only make sense months or years down the line. Ideally, you want to be able to buy when the market is down and when the market is up so that, on average, your money is growing with the overall curve.
This strategy is called dollar-cost averaging. It’s the equivalent of keeping a warm top in the car so that you can enjoy the journey regardless of the weather.
It’s a strategy, however, that requires discipline and planning. Dollar-cost averaging can save an investor from panic buying when they think the market will keep climbing or selling out when they think it’s bottomed out.
If you buy high and sell low, you will lose all your money. The challenge is that, whilst we know that buying low and selling high is a sure way to make incredible gains, we never know what the market will do tomorrow.
Dollar-cost averaging means that the investor buys into the markets on a smaller but more regular basis than just purchasing a chunk of stock when they get a bonus or large payout. For example, instead of investing ten grand in one go, an investor can choose to invest two grand a month for the next five months.
Or, instead of only investing when you have a specific amount of money, you can choose to invest a smaller amount, more regularly. Not only will you benefit from the growth of dollar-cost averaging, but you’ll also develop a healthy habit of investing part of your regular income rather than relying on an annual or quarterly lump sum that can be easy to spend elsewhere.
This is not the only way to leverage better returns in the markets, but for an investor who is not familiar with investing, it’s a wise approach to early investment strategies.