In the most recent Eureka Report’s Weekend Brief, Alan Kohler said this about trying to time the market:
If you're investing in the market, or equities as an asset class, it’s best not to try to time it in my view, because it’s too hard and usually leads to mistakes. A safer approach is to use either dollar cost averaging, or if you're fully invested already, portfolio rebalancing.
Dollar cost averaging involves investing the same amount regularly in a security with a variable price. As it gets more expensive, you buy fewer of them and as it gets cheaper you buy more of them.
Portfolio rebalancing simply means maintaining asset allocation proportions as markets move around, so if the stock market falls and your allocation to equities goes down, you top it up.
Both strategies involve buying low and selling high, which is the right thing to do, and the opposite of what most inexperienced investors do.
How do you pick the bottom? You won’t. Successful long-term investing isn’t about perfect timing. It’s about having a disciplined process which helps us overcome our own tendencies and biases.
Let’s look at how you would put dollar-cost averaging into practice. For the sake of using round numbers, let’s say you’ve got $100,000 in cash. You’re going to deploy that into a diversified portfolio of exchange traded funds and you’re going to deploy $10,000 per week for the next ten weeks.
Using the InvestSMART Growth Portfolio as an example. Here are the holdings and the percentages for each:
|ETF NAME||CODE||ASSET CLASS||WEIGHT|
|BetaShares Aus High Interest Cash ETF||AAA||CASH||7.94%|
|iShares UBS Composite Bond ETF||IAF||BONDS||16.55%|
|VanEck Vectors FTSE Global Infrastructure (Hedged) ETF||IFRA||INFRASTRUCTURE||4.82%|
|iShares MSCI Australia 200 ETF||IOZ||AUSTRALIAN SHARES||26.29%|
|Vanguard Australian Property Securities||VAP||PROPERTY||3.91%|
|Vanguard Global Aggregate Bond Index (Hedged) ETF||VBND||BONDS||7.59%|
|Vanguard MSCI Index International Shares ETF||VGS||INTERNATIONAL SHARES||32.91%|
If we started dollar-cost averaging ten weeks ago and bought the above holdings at the market open prices every Tuesday morning, here’s how many units of each ETF you would have been able to buy.
As the growth assets such as Australian shares, international shares and property dropped your $10,000 bought a lot more units. Also, notice how stable the defensive portion of the portfolio is during these volatile times. IAF and VBND hardly budge and this is the benefit of having a portfolio diversified across asset classes.
Only pure luck will have you picking the bottom of a market, especially when it’s as volatile and unprecedented as this one. But, deploying a systematic approach and averaging into the market over time will see your portfolio come out the other side of this crisis in a strong position.
The InvestSMART Diversified Capped Fee portfolios allow you to set a regular contribution plan in place to help you when it comes to dollar-cost averaging. Click here to find out more.