This examines the multiple benefits of dollar cost averaging as a long-term investment strategy.
There are two types of markets: "bull" markets and "bear" markets. Bull markets relate to those periods when the market is trending upwards.
Conversely, bear markets are flat or downward trending. In bear markets, the tendency for most investors is to stay on the sidelines and wait for signs of a market recovery before investing. This makes sense. After all, why invest in a market which is either falling or going nowhere?
The problem, however, is that it is very difficult - many say impossible - to determine when the next bull market is about to start. In fact, it is usually only after many months of excellent returns that a bear market is declared over and a bull market officially in play. As a result, most investors sit on the sidelines for too long and therefore miss out on the substantial gains made at the very start of a bull market.
So, if it is impossible to perfectly time your investment entry point, is it better to invest near the start of the bear market - or wait until after the next bull market begins?
The answer is neither.
Adopting a "dollar cost averaging" strategy during a bear market may be one way to avoid issues of market timing. This is where you invest the same amount of money on a regular basis over a number of years.
There are two performance benefits from this approach.
- Firstly, you are not putting all your money at risk should there be a large market fall early in a bear market.
- And secondly, you are assured that a portion of your money will participate in the early gains of the next bull market.
Here's how dollar cost averaging works.
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