As we have seen with recent equity market reactions, short-term price movements are often unpredictable, and nobody can be certain when the next upturn will begin. In hindsight, all down markets look like buying opportunities but in the moment, it is not always easy to commit money to an investment that has gone down in price.
Those investors who use a dollar-cost averaging (DCA) program to build their long-term portfolios can have an advantage. A DCA program mandates regular, modest investments, rather than one major lump-sum commitment. As such, investors need not focus on predicting market movements.
DCA can fit nicely with personal cash flow, acting as a way of saving on a steady basis. Payments can be made at any regular intervals, such as monthly or quarterly. DCA can work particularly well with funds as you can buy exact dollar amounts of a fund, which may not always be possible with share purchases. However, there is no reason why DCA can’t be used to build any security position, especially in these times in which broad declines have affected many securities.
The example (chart) uses S&P/TSX Composite Index returns to depict a DCA program through the extended bear market period we experienced from 2000 to 2002. Each quarter, $1,000 was invested. Despite poor market performance at that time, the DCA program resulted in a modest gain of $1,130 ($17,130 less $16,000), plus the ownership of significantly more units which benefited the portfolio as time went on. Had a lump sum investment of $16,000 been deployed at the beginning of 2000, it would have returned a small loss, with an overall value of $15,633 and 1,902 units owned (versus 2,084).
During times of uncertainty, DCA can be a useful strategy. It allows you to take the emotions out of investing, while continuing to put money to work. Even during down or bear market times, DCA is a good reminder that a thoughtful investing plan can result in real progress toward achieving your wealth-building goals.
Financial professionals who want to see how they can map their exit or gain a major competitive edge from Optimize’s next generation multi-family office platform while benefiting from a premium advisor compensation structure should reach out to Matthew McGrath for a confidential discussion at (416)-907-6733 or email matthew.j.mcgrath@optimize.ca.