When should I add money to my investments?
The simple answer is that as an investor it makes sense to buy when assets are cheap, and sell when they are expensive. But plenty of investors buy when news is good and investments are expensive – then sell when the news is bad, and investments have fallen in value. It’s a recipe for financial ruin.
I hear a lot of talk about how important it is to aim for ‘good market timing’. That means buying at the bottom of the market and selling at the top. And yes, wouldn’t it be great if we could all achieve this 100 per cent of the time? However, no market timers I know consistently get their timing right year after year. That’s because no one has yet worked out how to read the future.
The following table helps illustrate the difficulties of trying to consistently pick the ‘right’ market to invest in year in, year out. Over the last seven years for instance, US shares have dished up some impressive returns. But if we look to the last 20 years, Australian shares have topped the league table, with returns averaging 8.6% annually according to Vanguard data.
2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
Top performing asset class | Australian Property | Australian Property | International Shares | US Shares | US Shares | US Shares | International Property |
% Return | 14.3% | 13.2% | 13.4% | 6.2% | 31.7% | 7.9% | 7.2% |
Source: Vanguard
Now, you could be clever – or lucky – enough to pick the top performing markets every year. But I’d say the odds of pulling off such a staggering feat are about nil. Equally, your chances of picking the worst performing investments are also pretty slim.
The point is, if you try to add money to your investments at the right time, you need to be spot on with your investment timing decisions a lot of the time. And that’s just too difficult.
A far easier strategy is to invest when you have the funds available, and this is where dollar cost averaging can be so helpful. All you do is decide how much and how often you are going to invest. You may decide to invest monthly, quarterly or every six months. The timeframe really doesn’t matter because over time you will end up paying more of an average price for your investments, which helps smooth returns.
The key issue is that dollar cost averaging eliminates worries over when you should invest – a concern that can see people procrastinate to the point of never investing at all.
The beauty of dollar cost averaging is that it forces us to buy more when investments are cheapest and the least when asset markets are most expensive. On that basis alone, it can be a discipline worth using if you’re being hamstrung by uncertainty over when to add money to your investments.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.
[1] https://insights.vanguard.com.au/static/asset-class/app.html
Frequently Asked Questions about this Article…
The best time to add money to your investments is when you have the funds available. Trying to time the market perfectly is extremely difficult, so a more effective strategy is to invest regularly through dollar cost averaging.
Dollar cost averaging is an investment strategy where you invest a fixed amount of money at regular intervals, regardless of market conditions. This approach helps smooth out the effects of market volatility and ensures you buy more shares when prices are low and fewer when prices are high.
Market timing is challenging because it requires predicting the future movements of the market, which is nearly impossible to do consistently. Even experienced investors struggle to buy at the market's lowest point and sell at its highest.
Over the last seven years, US shares have shown impressive returns, while over the past 20 years, Australian shares have averaged an 8.6% annual return. However, the top-performing asset class can vary each year, making it difficult to consistently pick winners.
The risks of trying to time the market include missing out on potential gains if you sell too early or buy too late. This approach can lead to financial losses and increased stress due to the unpredictability of market movements.
Dollar cost averaging reduces investment anxiety by eliminating the need to decide the 'perfect' time to invest. By investing regularly, you avoid the stress of market timing and ensure a more consistent investment approach.
Investing when you have funds available allows you to take advantage of market opportunities without the pressure of timing the market perfectly. This approach, combined with dollar cost averaging, can lead to more stable returns over time.
InvestSMART offers a regular contribution plan option for all Professionally Managed Accounts, making it easy to add funds with the click of a button. This convenience supports a consistent investment strategy without the hassle of market timing.