How to Invest in Volatile Times
Markets are down
There is no doubt that the current stock market conditions are very challenging. At the time of writing, the Nasdaq, historically one of the best performers, is down over 23% in 2022.
So, had you invested $100,000 (USD) early in the year, you’d be sitting scratching your head looking at a valuation of just $77,000 and no doubt somewhat concerned.
Investing in the equity market is, and always will be, subject to inherent volatility. During times like these, the volatility is even greater.
We are in a period of high inflation, something many of our younger audience will not have experienced before. This inflation requires careful management by the Federal Reserve with respect to rising interest rates and winding down the quantitative easing policies that had been deployed to buoy the economy.
We also have the ongoing war between Russia and Ukraine adding uncertainty. Uncertainty is what stock markets dislike the most.
Staying invested in these tricky times is always the correct advice. If your time frame for a return on investments is short and you need quick access to the cash, you shouldn’t be investing in the equity markets. Stay the course, but be wise about it.
Dollar Cost Averaging mitigates risk
One well known, tried and tested way to mitigate risk when investing is to adopt a strategy called “Dollar Cost Averaging.” This is especially true in times like these when volatility is high.
Dollar Cost Averaging involves investing funds into the market at regular intervals. When the markets are high you get fewer market units for your investment, when low you get more.
Let’s illustrate this with a one-time $100,000 (USD) investment.
On 1 January the value of the Nasdaq was 15,832, so investing $100,000 would have given you 6.316 units. Those 6.316 units multiplied by the Nasdaq’s value today of 12,144 gives your investment a value of $76,701.
Had you invested $20,000 on the first of each five months into the Nasdaq, your portfolio would look like this:
Using this method, you would have accumulated 7.133 units on the same investment, which is worth $86,623 today – nearly $10,000 more than a one-time investment.
In times when markets are surging, then of course you may find the strategy of buying in one go provides a better return, but utilizing a Dollar Cost Averaging strategy will always reduce your risk.
Whilst the above shows returns using two differing strategies for a short term investment, when we look to invest over the longer term (five to twenty years), such as for retirement, children’s school fees, universities, house deposits, etc., then we are inevitably going to see ups and downs during volatile and benign times. Dollar Cost Averaging allows you to mitigate the risk of plunging markets.
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Dollar Cost Averaging is practical
Most investors don’t have large lump sums readily available, so investing a fixed amount on a regular basis makes sense. Taking a certain percentage of your monthly salary and placing it into a pension or savings plan allows you to accumulate your wealth and reduce market risk.
Another aspect to consider is to be successful in executing your plan is to keep emotions out of any investment decisions. Trying to time the market is a futile exercise, so sticking to a strategy where you invest the same amount on the same day of each month will always work better over the long term.
Your personal situation will change during your savings journey – this is more relevant to your investment strategy than where the current market position.
Don’t let inflation smash your portfolio
Inflation will most likely be with us for a good while. While those of us in Southeast Asia are not experiencing quite the inflation levels of the US and Europe, we are beginning to catch up. Recent reports have been showing that the cost of living increases here are now around 5% per annum.
This means that any cash sitting in the bank earning zero interest isn’t just losing against inflation but it’s getting smashed. Basically, that money is costing you 5% a year, so it needs to be working in order to beat inflation: invested in good businesses, shares, bonds.
There are many ways to invest; some are successful, some less so. But having a strategy in place is vital. Sticking to it, maintaining a mindset is key to making sure the strategies you choose are successful. Time has shown that Dollar Cost Averaging is such a strategy.
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