Does dollar cost averaging deliver the results it claims?

By Dale Gillham. Published at Apr 17, 2020, in Market Wrap

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

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

Conflict of Interest Notice

S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

Publishers Notice

The information contained in this article is current at the finalised date. The information contained in this article is based on sources reasonably considered to be reliable by S3 Consortium Pty Ltd, and available in the public domain. No “insider information” is ever sourced, disclosed or used by S3 Consortium.

Australian ASX Small Cap stocks | Why Finfeed.com is Australia’s leading small cap publication

Founded seven years ago, Finfeed.com is Australia’s leading and longest standing website for investor and finance news, education and expert opinion.

Published by StocksDigital, Finfeed was created to report daily on the comings and goings of ASX listed stocks in the small cap market.

As the first digital publication dedicated specifically to this space, Finfeed soon became the most trusted publication in the market, quickly garnering over two million page views – a number that continues to rise.

Finfeed.com provides its readers with informative articles that tackle the latest in market moving #ASX small cap news, plus exclusive content you won’t find anywhere else. It is aimed at those with an interest in investing, market education, company performance, start-ups and much more.

Finfeed.com is the only media organisation operating under the strength of a Financial Services License and is backed by leading journalists and analysts all with brands of their own.

The website aims to inform, educate and entertain with content that drills down into the heart of financial matters.

Finfeed is a leading source of investor and market information, with everything investors need to know about how to invest written in a way that anyone can understand. 

Over the years, the website has expanded beyond exclusively reporting on small caps, to profile Australia’s leading ASX listed small, mid and large caps as well as some of the country’s most successful CEOs and business leaders to find out what makes them tick.

Every day you will find fresh content covering:

Fast Facts

Over 4,000 articles published

Over 2.3 Million Page Views and counting

Over 10,000 followers on social media

Subscriber list growing by 2% monthly

Thanks for subscribing!

X