By Glen Trillo, Head of Wealth.
We are sometimes asked about dollar cost averaging when investing client funds and whether this is a good idea. It is certainly something which should be considered, particularly for first-time investors and those who are introducing a substantial lump sum deposit into their investment portfolio.
‘Choice of least regret’ when it comes to dollar cost averaging. Whilst markets in a linear form would indicate that anytime is a great time to invest – reality is far form the case
When Stewart Group considers this point, we take into account the following:
- Asset Allocation: What is the weighting toward shares as opposed to bonds?
- The dollar amount of shares being purchased – If the amount is substantial, there can be a compelling reason to buy shares progressively over a to 12-month timeframe. The reason for this is that if you purchase all the shares in one tranche, and shortly after that the market drops, you may, on paper at least, see a fall in value early on which you were not expecting. By gradually purchasing shares over a period, you achieve the average unit price over that period which should help you to avoid the troughs. With that said, by purchasing shares over a 6 – 12 month period, you may also miss out on the upswing if the market was to climb throughout the whole of that period
- Are you a first-time investor? If so, then reason to dollar cost average may be stronger than that of a seasoned investor. We are all aware that investing should be done with a longer-term time frame in mind and so to purchase all the shares in one tranche may seem compelling. We cannot pick and time the market, and we know that the market rewards investors over the long term. With that said, if you are an investor of shares for the first time, you may sleep better knowing that your funds will receive the average unit price over a period
- ‘Beware the Ides of March’ The time of year may also play a part. If you are investing for the first time into foreign shares toward the end of a tax year, you may be better to hold off purchasing foreign shares (FIF assets) until post 01 April due to taxation reasons (FDR - Fair Dividend Rate) and thereby receiving 12 months tax relief) Blindly investing in the final few months of the financial year requires the market performance to be well above the average for the tax hurdle to be overcome
Behavioural finance – Mark Twain said, “We should be careful to get out of an experience only the wisdom that is in it and stop there lest we be like the cat that sits down on a hot stove lid. She will never sit down on a hot stove lid again and that is well but also she will never sit down on a cold one anymore." – aka 1987 for many Kiwi investors whom after 30 years will still not invest back into shares, despite the 2.40% p/a premium shares have performed over bonds - That was an expensive exercise
The important principle is. No one size fits all. At Stewart Group, we will structure a shares purchase programme to suit a client's individual requirements