When the markets take a downward turn like they have recently, it’s important not to panic and rush to sell. History has shown time and time again that the markets rebound and continues their long-term upward trajectory.
In fact, not only should investors not rush to sell, you may also hear people saying, “buy the dip”. This means investing heavily now, while prices are low, and waiting for them to rise again for a substantial gain. It’s a nice idea, but how can you be sure share prices have already hit the bottom of the dip? Investing heavily now could result in big short-term losses if prices continue to fall before rebounding.
That said. There is a more reliable way to benefit from dips in the market like this one, by using Cost Averaging.
What is Cost Averaging?
Rather than investing large lump sums of money when the price seems right, cost averaging means investing smaller amounts at regular intervals, regardless of price. This means you will buy when prices are high and low, rising and falling. Slow and steady.
3 Benefits of Cost Averaging
1. It’s less risky
Cost averaging reduces your risk by ensuring you never invest heavily and see the share price fall soon after. It takes the chance of bad timing out of your investing decisions.
2. It still lets you “buy the dip”
Although investing big is risky, dips in price are still an opportunity. Cost averaging ensures you are always buying in smaller amounts, including when the market dips. Meaning you get the benefit of “buying the dip” when the markets recover.
3. Potential to boost your long-term gains
You might think, if you buy at low prices and you also buy at high prices, your investments will cancel themselves out. But as we mentioned at the start, history has shown markets will continue a long-term upward trajectory. So, you can make bigger gains when you buy low, but even when you buy at a higher price you can still make gains over time. This means cost averaging can actually boost your long-term gains while avoiding heavier short-term losses.
We’re here for you
If you want to discuss cost-averaging or increasing your regular investment amounts to take advantage of the current dip, get in touch today.