Stop trying to time the share market and take advantage of share investing using dollar cost averaging. Ultimately, there are only two ways to make money: by working and/or by having your assets work for you. If you keep your money in your back pocket instead of investing it, your money doesn’t work for you and you will never have more money than what you save. 

Over the last 100 years global share markets have experienced many major set-backs, including the Great Depression of the 1930s, several wars, the ‘crash of 1987’ then the Global Financial Crisis twenty years later. But for every low, a recovery has followed – they just take time. What stops most people from investing is not knowing where to invest or when to jump in. Although nobody knows exactly when a market or a particular share price has found its base price, we can employ a strategy to remove this speculation and focus on a longer term investment plan. 

Averaging into the share market 

A regular savings plan involves putting aside a small amount of funds on a regular basis to make investments of a set amount at regular intervals. This is a suitable strategy for people who don’t have a large sum of money to invest immediately but are able to build up an investment portfolio over time. The other advantage of investing this way is that it removes the decision-making process of trying to pick the cheapest time to invest (which is impossible). Instead, investing regularly in the market applies the concept of ‘dollar cost averaging’.  

The aim of dollar cost averaging is that the average cost of the investments will always be below the average value of the investments during the period. 

Take this example 

A novice investor called Adam has no savings but decides to make the effort and after three short months he has saved $500 to invest. It was so easy that Adam continues to save and invest $500 every three months over a year. During this time the share price rises and falls, which gives the overall result as follows: 

As can be seen in the table, Adam benefits despite the upward and downward fluctuations in the market. The average cost of the units at the time of the last investment is $1.01 ($2,000 divided by 1977 units), yet the value of the share at that point in time is now $1.40. Furthermore, dollar cost averaging can act as a form of diversification, enabling investors to stagger their entry into the market instead of taking the risk associated with making a large single purchase.  

Be sure to consult your financial planner if you wish to take advantage of this strategy. If you have been struggling with your investments, give us a call at 1300 043 529 and we discuss about how we can help you build your wealth in ways that aligns with your values. 

At Hejaz, We believe that good investment decisions come from research, analysis, years of experience and a deep, human understanding of markets. Whether it’s navigating the ASX, growing your capital via international markets, buying big city buildings or chasing outperformance in property markets, our expert teams are focused on taking your return on investment to a whole new level. Let us make the hard decisions for you and do what we do best.  

Note: past performance is not an indicator of future results. 

This article uses a case study to demonstrate the strategy of holding in cash and waiting for market opportunities (or volatility) before investing. It demonstrates the key benefits as well as consequences and urges clients to seek professional advice from a qualified financial planner.  

As any long-term share market investor knows, markets can go up and they can go down. While most people view a falling market as a bad thing, some investors see it as a buying opportunity. After all, it’s better to pay, say, $60 for a share after a market dip than $100 for the same share at the market peak. 

Of course, to be able to exploit these buying opportunities, the cash needs to be available. That means hoarding some extra cash while markets are happy in anticipation of a rainy day. It also means having a strategy around when to invest, how much to invest, how long to hold and what to invest in. There isn’t a single, off the shelf solution to this, but 58-year-old Adam provides an example of what the rainy day investor needs to think about.  

How much? 

Adam is a seasoned investor with a sizable self-managed super fund. He has weathered several market slumps over the years, and when markets are trading normally, with low volatility, he is happy to build up a cash reserve of up to 20% of his fund’s value to be used when the share market goes ‘on sale’. The cash comes from dividends and distributions, contributions and realised capital gains. 

When to invest? 

With no hard and fast rules, Adam decides that if the market falls by 10% he will invest 25% of his reserved cash. For each further fall of 10% he will invest a further 25%, so after a market fall of 40%, all his cash stash will be invested. This could occur in a short time period or evolve over many months of ups and downs. In some market corrections he may not use all of this cash. 

What to invest in? 

Adam has some favourite shares and if they fall significantly in value he will top up his holdings. However, he knows this involves more risk than buying the market, so most of his purchases will be of index funds.   

How long to hold? 

In volatile markets price movements can be sudden, dramatic, and in either direction. Adam’s strategy is to sell any shares that produce a gain of 20% or more during the recovery phase. He also uses stop-loss orders to provide some protection from further sharp falls. Adam also limits himself to buying quality assets, and is prepared to hold them long term if the recovery is a slow one. 

Adam knows his strategy isn’t perfect. If share prices don’t fall, he is left holding larger amounts of low-yielding cash than would normally be the case. If they fall a long way, he’ll miss out on buying at the bottom of the market. But Adam gains some peace of mind that if (or when) market corrections do occur, his strategy should provide some protection to his super portfolio and improve his long-term position. 

Seek advice 

This is just one example of a rainy day cash strategy. Everyone’s circumstances differ, and it is important to seek appropriate advice specific to your situation

6 ways to fight fear with facts

You wouldn’t be human if you didn’t fear loss.

Nobel Prize-winning psychologist Daniel Kahneman demonstrated this with his loss aversion theory, showing that people feel the pain of losing money more than they enjoy gains. Thus, investors’ natural instinct is to flee the market when it starts to plummet, just as greed prompts people to jump back in when stocks are skyrocketing. Both can have negative impacts.

But smart investing can overcome the power of emotion by focusing on relevant research, solid data and proven strategies. Here are seven principles that can help fight the urge to make emotional decisions in times of market turmoil.

1. Market declines are part of investing.

Stocks have risen steadily for a decade, but history tells us that stock market declines are an inevitable part of investing. The good news is that corrections (defined as a 10% or more decline), bear markets (an extended 20% or more decline) and other challenging patches haven’t lasted forever.

The Standard & Poor’s 500 Composite Index has typically dipped at least 10% about once a year, and 20% or more about every four years, according to data from 1949 to 2018. While past results are not predictive of future results, each downturn has been followed by a recovery and a new market high.

2. Time in the market matters, not market timing.

No one can accurately predict short-term market moves, and investors who sit on the sidelines risk losing out on periods of meaningful price appreciation that follow downturns.

Every S&P 500 decline of 15% or more, from 1929 through 2018, has been followed by a recovery. The average return in the first year after each of these declines was nearly 55%.

Even missing out on just a few trading days can take a toll. A hypothetical investment of $1,000 in the S&P 500 made in 2009 would have grown to more than $2,700 by the end of 2018. But if an investor missed just the 10 best trading days during that period, he or she would have ended up with 38% less.

3. Emotional investing can be hazardous.

Kahneman won his Nobel Prize in 2002 for his work in behavioral economics, a field that investigates how individuals make financial decisions. A key finding of behavioral economists is that people often act irrationally when making such choices.

Emotional reactions to market events are perfectly normal. Investors should expect to feel nervous when markets decline, but it’s the actions taken during such periods that can mean the difference between investment success and shortfall.

One way to encourage rational investment decision-making is to understand the fundamentals of behavioral economics. Recognizing behaviors like anchoring, confirmation bias and availability bias may help investors identify potential mistakes before they make them.

4. Make a plan and stick to it.

Creating and adhering to a thoughtfully constructed investment plan is another way to avoid making short-sighted investment decisions — particularly when markets move lower. The plan should take into account a number of factors, including risk tolerance and short- and long-term goals.

One way to avoid futile attempts to time the market is with dollar cost averaging, where a fixed amount of money is invested at regular intervals, regardless of market ups and downs. This approach creates a strategy in which more shares are purchased at lower prices and fewer shares are purchased at higher prices. Over time investors pay less, on average, per share. Regular investing does not ensure a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

Retirement plans, to which investors make automatic contributions with every paycheck, are a prime example of dollar cost averaging.

5. Diversification matters.

A diversified portfolio doesn’t guarantee profits or provide assurances that investments won’t decrease in value, but it does lower risk. By spreading investments across a variety of asset classes, investors can buffer the effects of volatility on their portfolios. Overall returns won’t reach the highest highs of any single investment — but they won’t hit the lowest lows either.

For investors who want to avoid some of the stress of downturns, diversification can help lower volatility.

6. The market tends to reward long-term investors.

Is it reasonable to expect 30% returns every year? Of course not. And if stocks have moved lower in recent weeks, you shouldn’t expect that to be the start of a long-term trend, either. Behavioral economics tells us recent events carry an outsized influence on our perceptions and decisions.

It’s always important to maintain a long-term perspective, but especially when markets are declining. Although stocks rise and fall in the short term, they’ve tended to reward investors over longer periods of time. Even including downturns, the S&P 500’s average annual return over all 10-year periods from 1937 to 2018 was 10.43%.

It’s natural for emotions to bubble up during periods of volatility. Those investors who can tune out the news and focus on their long-term goals are better positioned to plot out a wise investment strategy.

Avoiding investment in highly leveraged ASX-listed companies can lead to stronger returns, according to a study by environmental, social and governance (ESG) and Islamic fund manager Hejaz Financial Services.

Their recent analysis showed that over one year, the total return (weighted average) for companies with a debt/market capitalisation ratio less than 30% was 14.92%, which was three times that of companies with ratios of 30% or higher.

Over a period of three years, companies with relatively low debt/market cap ratios returned 25.35% (weighted average), compared to 8.89% for the rest of the market.

Over five years, low-debt companies more than doubled the investment return (on weighted average) of more highly geared stocks.

The sectors most likely to include highly-leveraged companies were financials, real estate and utilities, with IT and healthcare companies carrying debt/market cap ratios of less than 30%.

Hakan Ozyon, Hejaz’s senior portfolio manager and chief executive, said that approach helped deliver consistent returns for clients and help outperform ‘mainstream’ ESG funds.

“By taking a values-based approach to investing which, for Hejaz, involves excluding highly leveraged companies, we’ve delivered a gross return of 9.37% per annum since inception,” Ozyon said.

“With interest rates reaching record lows and debt being cheaper than ever, we’ve seen a sharp rise in management’s comfort with taking on greater levels of debt.”

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