Clark Wealth Management Group - ScotiaMcLeod Fredericton

As bewildered talking heads try to make sense of chaotic and directionless markets, are you left feeling uncertain, confused or even cynical? You’re not alone. Many investors are finding the current environment challenging. 

Rather than get exhausted trying to figure it all out, here’s a strategy that will allow you to get on with the important business of investing for your future. Ultimately, it will allow you to stop trying to predict the unknowable and give you peace of mind.

Dollar-cost-averaging is a simple and effective way to invest during times of uncertainty. Here’s how it works. First identify the investment or mix of investments best suited to meet your longer term needs from a risk tolerance and return perspective.

Using simple math, divide the amount of money you are going to invest into equal amounts. For example, if you are investing $24,000 in total, divide that amount by the number of months in a year (12). That leaves you with twelve $2,000 investments to make each month over the coming year rather than a single $24,000 investment at today’s prices.

An important step in this strategy is to set things up so your recurring investment happens automatically. If, as could happen in the coming year, prices of the investment you’re buying move down with markets you will be buying more units at lower prices throughout the year. If you don’t automate the process it’s probable that your emotions will sabotage your plan. As news and markets get worse (and purchase prices get better) a natural emotional response would be to stop investing. Executing your plan automatically is important for this reason.

Let’s say that you already own an investment that you would like to continue to own longer term but think the prices may fall in the coming year. A slight variation on dollar-cost averaging strategy could work for you as well. The two main problems with selling a good investment because you think the price may decline are: 1) you may be wrong and prices may not decline. 2) It’s impossible to know when exactly to buy the investment back.

Dollar-cost averaging can help. Determine how much you would like set aside to be averaged back into the investment in the coming year at presumably lower prices. For example you may have $50,000 in an investment fund you believe is a great long term investment. You may decide to set $25,000 aside into a more secure short-term bond or money market investment today and simultaneously make a plan to reinvest that $25,000 throughout the coming year. Again, automation of the process is critical for the reasons mentioned before. 

As always, it is important to effectively manage your transaction costs (if any) when using this strategy. With proper planning and a good advisor that should be easy to do. It may seem obvious but it is worth noting that dollar-cost averaging doesn’t guarantee a profit if prices keep falling. Also, in cases when prices are rising steadily over time, the opposite strategy – lump sum investing – will be the preferred approach.

Keir Clark, is senior wealth advisor, with Clark Wealth Management Group, associate director wealth management and branch manager at ScotiaMcLeod in Fredericton, NB. He can be reached online at www.keirclark.ca or by telephone at 506-450-6465.

Information and opinions contained herein have been compiled from sources believed reliable but no representation or warranty, expressed or implied, is made as to the accuracy or completeness.