Growing the value of your investments is all about time in the market and not timing the market.
When you approach investing, you want to get the 'bargain price,' buy them low and sell them when they are high to make a nice profit. It is tough to tell when the share price is low or high, and often you do not know until after the transaction, more often than not, the experts also get this wrong. Investing can be done by one of two ways – often and with smaller amounts or saving up and investing the accumulated amount all at once. By investing, often and with smaller amounts, you are maximising your time in the market, and the ups and downs in the market will matter less due to dollar-cost averaging.
Dollar-cost averaging
Dollar-cost averaging is when you choose to invest a certain amount regularly, regardless of what the price is. With dollar-cost averaging, when prices are high, you will end up with fewer stocks, but when prices are low, you will end up with more, smoothing out the money you invest when the price is more than average. This investment technique favours long term investing and removes much of the detailed and expert work of attempting to time the market to make purchases of shares at the best prices.
The aim of dollar-cost averaging is to avoid making the mistake of one lump-sum investment that is ill-timed in regards to the price paid. For example, if you invest EUR5,000 at the end of the year, then your average purchase price for the year is going to be whatever the price happened to be on that day. But if you invest EUR100 a week, your average price may be lower. The average price paid is usually lower because in general share prices generally increase over time. Furthermore, you have also been earning returns on each investment and taking advantage of compounding returns.
The other advantage of dollar-cost averaging is that by investing smaller amounts, but regularly you are building a habit and taking the human emotion out of investing.
Maximising your time in the market
The best time to start investing is now (related article: How to gain control over your money). The longer you invest for, the better your returns are likely to be. You can see this in action by looking at the majority of funds where growth is evident over time. With the additional help of compound returns, your regular contributions can accumulate to something pretty impressive when you allow time to do its thing.
If an investment is fundamentally sound and you as an investor are well-diversified, then it will grow over the long term. By not focusing on the market fluctuations year to year, you can adopt a set and forget approach, carry on living your life while your money goes to work for you.
Overall, start investing as soon as you can, invest small, invest often.
Find an amount that you can consistently keep up with and then think about the frequency that would work best for you. I have set up an automatic payment to my investment account a couple of days after I receive my monthly salary. Hence, I have a consistent habit, and I find that the sacrifice is small because it has been transferred out of my account before I even realise that it is there.
Information provided by goBuoyant is general in nature and does not take into consideration your personal financial situation. It is for educational purposes only and does not constitute formal financial advice. Remember, the value of any investment can go down as well as up.
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