Staying ahead when markets are volatile

Most investors understand share prices go up and down, but prolonged downturns can be the ultimate test of resilience. As difficult as it might be to keep your cool, sometimes the most sensible course of action is to simply stay the course. 

The good news is there is a simple strategy that can help you filter out the noise and stay consistent with your investing: dollar cost averaging.

Essentially, dollar cost averaging involves investing fixed amounts at regular intervals, regardless of how the market is performing.

Taking this approach allows you to buy more shares when prices are low and fewer shares when prices are high. The idea is that you end up with a lower average cost per share than if you were to purchase in bulk. 

Of course, it’s by no means a guaranteed way to make money, and if the market dips your portfolio might suffer just like everyone else’s. But for those with discipline and a long-term outlook, dollar cost averaging can take a lot of the stress and pressure out of growing your investments.

What are the pros and cons?

So why is dollar cost averaging so appealing, particularly to newer investors? Here are just some advantages:

• You can avoid the pitfalls that come with trying to time the market
• Taking a methodical approach means you’re less likely to make emotional decisions 
• You don’t need a lump sum to invest — little and often works well here.

As for the downsides, remember that: 

• The strategy alone won’t pay off if you pick losing investments
• More frequent transactions could mean you pay more in brokerage fees
• In a rising market, you might be better off making a lump sum investment

How do you get started?

First you’ll need to look at your budget and work out how much money you’re comfortable investing. This will come down to your risk tolerance, how much you earn each month, and how much of your savings you want to preserve as a financial buffer. 

There’s no number or percentage that will be the ‘correct’ amount, but keep in mind that the smaller the trade, the higher the brokerage fee will be as a percentage of your investment. 

Once you have a figure in mind, you’ll need to decide where you’ll be investing it. The DCA approach tends to favour investments like Exchange-Traded Funds, or ETFs, because of their built-in diversification, but it’s really important to do thorough research into what suits you best. 

Finally, you’ll have to choose a trading platform or broker to conduct your buying and selling. Look for one with low fees, a user-friendly interface, and access to the markets you’re interested in.

Once you're ready, it’s time to place your first trade. From here, the name of the game is consistency. If you can commit to investing a fixed amount regularly (for example, each month), it can help smooth the ups and downs of the market and reduce the average cost per unit over the long run.