Dollar cost averaging (DCA) is a powerful investment strategy that involves regularly investing a fixed amount of money into shares, regardless of market conditions. For investors, this method offers several significant benefits, particularly in the often-volatile stock market.

One of the primary advantages of DCA is the mitigation of market timing risk. Instead of trying to predict the best time to buy shares which can be difficult and stressful, investors spread their purchases over time. This approach averages out the cost of shares.

Currently, both the Australian and US share markets are at or near record highs, which may make some investors nervous about entering the market. They fear buying at the peak, only to potentially see a downturn shortly after. DCA provides a solution to this concern by spreading investments over time, reducing the impact of short-term market fluctuations. Even if the market experiences a correction, DCA allows investors to buy more shares at lower prices, potentially leading to better long-term returns.

Hewison Private Wealth manages diversified portfolios and regularly rebalances them back to their strategic asset allocation. This process not only ensures that the portfolio stays aligned with the investor’s goals but also provides a natural way to dollar cost average. By rebalancing, Hewison effectively buys more of the underperforming assets (at lower prices) and sells some of the outperforming ones, maintaining a disciplined approach that aligns well with the principles of DCA.

Below is a live client example with the purchase of company shares in Ansell Limited (ANN):

The purchase of additional tranches of shares in Ansell Limited when rebalancing this client’s portfolio over time has resulted in a dollar cost averaging effect. The outcome has been an overall gain of 27.70% versus just 16% on the original purchase.

Further, some new investors are nervous about entering the market at all time highs. The following chart shows the Australian All Ordinaries price index since 1900 and despite wars, pandemics, and economic calamities, it’s managed to create new highs providing solid long-term returns for investors:

DCA and managing your portfolio diligently by rebalancing back to a strategic asset allocation offers peace of mind. Knowing that your investment plan is steady and ongoing, regardless of market fluctuations, can reduce anxiety and help you stay focused on your long-term financial goals. In the context of the Australian market, with its unique blend of stability and growth potential, dollar cost averaging is an effective and low-stress way to build wealth over time.

Disclaimer: Any information, financial product or advice provided in this blog are general in nature. It does not take into account your needs, financial situation or objectives. Before acting on the advice, you should consider whether it is appropriate to you in light of your needs, financial situation and objectives.