Take Advantage of Market Volatility

Take advantage of market volatility with this approach.

Investors watching the markets lately are likely dizzy with the crazy fluctuations.  It can be hard to stay focused on long term goals and investment strategies.   When markets go down it can be difficult to fight the temptation to sell and when they go back up it can be just as hard to know when to get back in.  The result for many investors is selling when things are down and buying when things are up. (Exactly the opposite of what we are taught to do)

A simple investing strategy can help investors ride out the volatility and achieve better long-term results. Creating a systematic investing plan is a fool proof way to go.  This plan consists of investing the same amount of money in a regularly scheduled way, no matter what markets are doing.  When prices are high it means buying less units of an investment and when prices are low it means buying more units.  This averages out to typically a lower cost per unit, usually referred to as dollar cost averaging.

How it works

Here’s a simple example that shows how a systematic investing plan can benefit an investor. Let’s say Janice commits to investing $100 in an equity mutual fund every week. As it happens, the equity markets are especially volatile over the next two months:

Over the eight weeks, she invests a total of $800 and buys a total of 86.4 units. Her average cost per unit is $9.26. Had Janice invested her entire amount of $800 during week 1, her average unit cost would have been $10.00 versus the weekly investment strategy where her average unit cost was $9.26, a savings of 0.74 cents per unit.

In hindsight, she could have done even better if she had somehow known that week 3, when the cost per unit was at its lowest, would be the best time to buy. In that case, her $800 investment would have bought 114.3 units, worth $1,028.70 in week 8. However, she could also have done much worse if she had wrongly guessed that week 6, when the cost per unit was at its highest, would be the best time to buy. In that case, her $800 investment would have bought just 66.7 units worth $600.30 in week 8.

Not even the most skilled professional investors can say with certainty when markets have bottomed out or peaked, so a systematic investing plan is a disciplined approach than attempting to time the markets. By averaging out the cost per unit over time, and ensuring fewer units are purchased at high prices, systematic investing may help investors achieve greater returns, which aligns with the saying “buy low, sell high”.  It also takes the emotion out of it.

Investors who are systematically investing may be better able to take the long view through volatility. The best thing about a systematic investing plan is that it’s automatic and unemotional, helping investors avoid the emotions that affect us all and can lead to costly investment decisions. Instead of selling when prices are low, or “on sale,” investors with a systematic plan keep buying in all market conditions. Just as important, instead of missing the best days of a recovery because they’re out of the markets, those investors remain invested, leading to a potentially better outcome. 

-Jodi

Source: Manulife- My Solutions-