One of the most common questions that financial advisors get asked is whether or not now is a good time to buy stocks. The answer is yes, as long you are buying reputable companies with proven track records. No one can truly predict what will happen next on the market and it is never a good idea to try and do so. SSL recommends investing for the medium to long term in securities that display the least amount of volatility in markets. To determine the volatility of securities, analysts employ a technique called the Dollar-Cost Averaging (“DCA”).
According to Investopedia, the DCA is the buying of a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. The investor purchases more shares when prices are low and fewer shares when prices are high. Investors must remember that all investments carry with it a level of risk therefore there is no technique that will guarantee that an investor won’t lose money on investments. Financial advisors favour the DCA technique of investing as it does not require a lump sum of money to begin with, but rather, encourages regular deposit of the same amount over time.
To understand this method further, we can illustrate how this technique materializes. Let us assume that Matthew decided to invest $10,000 in Apple on the first day of the month for the next three months, without the restrictions of trade fees, no minimum amount and purchasing only whole number shares. One the first month, the share price was $100, on the second, $95, and on the last month, $105. When the price increased, Matthew was able to purchase less shares with the same fixed investment amount. The opposite also held true, when the price fell, he was able to buy more shares with the same amount of money. In this example, Matthew purchased 300 shares at an average cost of $100. Given that the current price is $105, the original investment of $30,000 would now be worth $31,500.
If the investor had invested all $30,000 in one of those months instead of spreading the cost across three, the market value of the portfolio could either be higher or lower than the $31,500, subject to the month of investment. Since no-one can accurately predict the future share price of stocks, and time the market, DCA is a safer alternative strategy used by persons worldwide to hedge their risk in an attempt to lower their average price per share. This technique eliminates the assumption that investors must have a large lump sum of money to invest and yields to more conservative, low income earners.