STRATEGIES FOR VOLATILE MARKETS
Missed opportunities can be costly
We all have our good and bad days and often, when we wake up in the morning, we’re not quite sure exactly what sort of day it’s going to be.
It’s the same with financial markets – some days the market’s up, but other days the market’s not so hot. And just like we’re never sure what sort of a day it’s going to be when we pull
back the curtains each morning, it’s tricky to know how the market will fare at the start of each day.
You may be thinking, what’s all this got to do with investment returns? Research shows that for a hypothetical $100,000 investment, if you had tried to pick the market and missed out
on just five of the top performing days over the 20 years from 1992 to 2012, you would have given up $159,453 in returns. And the more good days you miss, the lower your return will be.
If you’d missed 25 of the best days the market had during that time, you’d be down by $464,293.
MISSING TOP-PERFORMING DAYS CAN HURT YOUR RETURN
600,000
$590,791
Ending Value ($)
500,000
400,000
$431,338
300,000
$301,700
200,000
$219,885
$164,476
100,000
$126,498
0
Invested all time
Missing top
performing 5 Days
Missing top
performing 10 Days
Missing top
performing 15 Days
Past performance is not a reliable guide to future performance. Source: BlackRock and Bloomberg. Data from 31 August 1992 to 31 July 2012.
Missing top
performing 20 Days
Missing top
performing 25 Days
The best way to avoid missing the market’s best days is through a method called dollar-cost-averaging. This is a strategy that involves investing a fixed amount at regular intervals that
allows investors to buy more shares when their values are low and fewer shares when their values are high. What it means is that investors achieve a higher return when the performance of
markets improves.
DOLLAR COST AVERAGING STRATEGY – HYPOTHETICAL EXAMPLE
Month
Purchased
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total
Cost
Share Price
$25
$25
$20
$20
$18
$16
$15
$15
$17
$20
$25
$27
$243*
Average
Cost
Per Share
Investment
Amount
$100
$100
$100
$100
$100
$100
$100
$100
$100
$100
$100
$100
$1,200
Shares
Purchased
4
4
5
5
5.6
6.3
6.7
6.7
5.9
5
4
3.7
61.9
†
$19.39
Hypothetical example assuming fractional shares may be purchased. Does not represent any particular investment. No investment is risk free, and a systematic investment plan does not ensure profits or protect against loss in declining markets. Because dollar cost averaging involves continuous investment in
securities regardless of fluctuating price levels, you should carefully consider your ability to continue to purchase during periods of price declines. No guarantee or assurance is provided as to the achievement of these results.
* Average market price per share for 12-month period = $20.25 ($243/12 months). † Total investment amount ($1,200) divided by total number of shares purchased (61.9 shares).
Let’s take a look at a hypothetical example. In this case, an investor buys $100 in shares each month, buying fewer shares when prices are high and more shares when prices are low. The result
is the investor’s average cost per share is lower than the average market price over the same time. The investor was able to buy more shares with the same amount than had he or she invested
the money in a lump sum.
Put simply, dollar cost averaging is a way of making sure your investments minimise the likelihood of missing out on the great days in the market.
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