The closure of Chinese factories; which are responsible for around 30% of global exports, the lockdown of large areas of European nations such as Italy and France in an attempt to control the spread, and media hysteria on a global scale, has left Governments around the world facing a health vs economy battle. Furthermore, the Oil Price War kick started again after Russia declared it will not take part in limiting the supply of oil by 1million barrels per day as of the 1st of April, adding another layer of pressure to the situation
With all that said, we always recommend clients adopt a long-term view when investing. If you were to sit and watch markets at any given time, you will see they fluctuate, often wildly, on an hourly basis. Making decisions based on short-term activity can be extremely harmful to your long-term plans.
If you are able to look beyond the sensationalist headlines of newspapers and tv stations, investing during these periods can present many opportunities.
History tells us that now is currently the best time to be utilising any surplus cash or savings given that all funds and stocks are currently trading at a huge discount.
In simple terms, Dollar Cost Averaging is the practice of using regular deposits to help smooth out stock market investment volatility. The key point about dollar cost averaging is to invest on a regular basis. In a fluctuating market, cost averaging can allow you to benefit from buying more investment units when prices are lower.
This strategy can be really effective during bear market periods, as it allows you to purchase stocks when they are low. Essentially these uncertain times allow investors to purchase units at a discounted rate, setting you up for strong long-term gains.
By investing a consistent amount at regular intervals, you can gradually ‘drip-feed’ into the market regardless of the price on any given day. This allows you to:
The graph below shows the advantages of saving a regular fixed sum in a volatile market over the short to medium term. This comparison shows the value of two-unit holdings over a 10-year investment term.
At first glance, Situation ‘A’ appears to provide better fund performance over Situation ‘B’.
However, on closer inspection the benefits of unit price fluctuation become clear.
Under normal market conditions the stock market will always deliver fluctuating returns. As the market weakens, the investor is able to purchase more units for the same 1,000 premium contribution. These additional units thereafter accrue in value as the market swings upwards, much to the benefit of the portfolio.
The example demonstrates the advantages of saving in a fluctuating market in a 10 year savings plan; the investment return is greater for Situation ‘B’ despite the unit price being lower at the end of the investment term than that of Situation ‘A’.
The table on the left also illustrates the growth experienced after a crisis historically and why it could be ‘a valuable time to make your cash work for you.’