Is now the time to get into the stock market or the time to get out? Before answering that question you should consider your short, medium and long term goals. Do you need cash for your living expenses over the next 12 months? If you do need cash over the next 12 months but not immediately, you may consider a strategy such as Dollar Cost Averaging (DCA).
What is dollar-cost averaging?
Dollar-Cost Averaging is where you regularly withdraw or sell shares over a period of time. For example, if you need approximately $50,000 over the next 12 months to maintain your standard of living you may consider selling $1,000 of your share portfolio every Tuesday, for example. Or you may consider selling $4,000 on the first Wednesday of each calendar month. The day you sell is irrelevant – the important fact is that you implement the strategy on a set routine basis.
The benefit of this strategy is it removes the win or lose mindset. That is if you sell today and the market goes up, then you may wish that you waited. Conversely, if you don’t sell now and wait, then the market may worsen.
Dollar-Cost Averaging is a passive investment or redemption strategy – it does not require the investors to closely monitor the market for appropriate buying or selling opportunities. While there is no strategy to eliminate the risk, this is a strategy that could be employed to help minimise the risk.
Similarly, if you feel that the market previously was overvalued, use a similar strategy to start or increase your investment in shares. Rather than trying to pick the best time to purchase shares, you could spread your investment acquisition over an extended period of time, say 12 months.
This purchasing strategy works best where you are investing for the longer term, say for 5 or more years. You essentially do this already with your superannuation as your super is generally paid monthly or quarterly. Once your employer sends your superannuation off to your nominated superannuation fund, it is immediately invested. So, assuming your salary stays consistent, you are essentially dollar cost averaging every month or 3 months.
Should you require more information about Dollar Cost Averaging, please feel free to contact Peter Quinn by submitting an enquiry or calling us on +61 2 9580 9166.