Does dollar cost averaging deliver the results it claims?
Published 17-APR-2020 11:18 A.M.
4 minute read
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Over the past month I have seen investors go through myriad emotions: from disbelief to fear and then greed.
Right now, investors are looking for certainty in an uncertain market with many asking whether the market has bottomed and is this stock cheap, and can I buy it now.
The more concerning question I am getting right now is from those who own stocks and are losing money, wanting to buy more because they believe the stock is cheap given it has fallen further.
It is one thing to attempt to bottom pick stocks that have fallen heavily, but it is another thing altogether to increase your risk by buying more of the same stock that you are losing money on. However, individual investors are not to be blamed for following the concept of dollar cost averaging given that it dominates the financial services industry investing mantra, despite it not delivering the results it claims.
Dollar cost averaging involves placing funds into an investment at regular intervals over a period of time regardless of whether the market is moving up or down. This practice can significantly impact the performance of portfolios and not necessarily in a positive way.
According to industry experts, dollar cost averaging reduces the risk of investing in volatile markets. Yet, right now, we are in a very volatile market and people are losing money. The issue I have with this concept is that the industry promotes this practice stating that it helps to avoid the ‘so called’ pitfalls associated with ‘timing’ your entry into the market.
I would argue otherwise because this strategy is questionable when markets are falling heavily, as you are subjecting your portfolio to a higher level of risk - exactly what you want to avoid in a volatile market. In my opinion, adding to an investment that is falling in value increases risk and should be avoided at all times. It is far better to wait for the dust to settle or buy an investment that is rising in value.
So what are the best and worst performing sectors this week?
With another shortened week due to Easter, the market has been a little subdued.
So far this week Consumer Staples is leading the way up over 5 per cent, while Information Technology is up nearly 5 per cent and Industrials and Materials are up over 1 per cent. After rising for the past two weeks, the Energy sector has fallen away to be the worst sector for the week so far, with it currently down over 3 per cent. This is followed by Financials and Consumer Discretionary both of which are just in the red for the week.
Looking at the ASX top 100 stocks, once again gold miner Newcrest is on top having risen 14 per cent followed by Adelaide Brighton, which is also up over 14 percent and A2 Milk and Northern Star are both up over 12 per cent. The worst performers so far this week include Unibail-Rodamco-Westfield down over 10 per cent, James Hardie down over 8 per cent, while Santos and Whitehaven are down over 7 per cent.
So what's next for the Australian share market?
The market has been rising over the past three weeks although momentum is slowing, which signals that the market is likely to start moving down soon to test the previous low. It has been 16 days since the low on 23 March and since then the market has risen 23 per cent with more than half of that rise occurring in the first five days. Right now, the market is indecisive and showing signs of weakness, so, while it is trading up, I don’t believe it will be for much longer. The best we can expect is for the current rise to continue for another week although I do expect it could start to fall away again any day.
While the move up in price has been good, it has not been overly strong, and I would need to see more bullish signs before I can comfortably say the significant pullback is over. For this to occur, I need to see the market falling away to test the low of 23 March and then to hold above this point for a period of time.
I still believe we have seen the worst of the market correction although I cannot discount that the market may fall below the low of 4,429 points set on 23 March. So, while many are jumping into stocks believing they are grabbing a bargain, right now there is a good probability that they may get more than they bargained for.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au
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