One concept that has dominated the financial services industry for decades and which has had a significant impact on the performance of portfolios in recent years is the notion of dollar cost averaging. According to industry experts, dollar cost averaging reduces the risk of investing in volatile markets and helps to avoid the ‘so called’ pitfalls associated with ‘timing’ your entry into the market.
Dollar cost averaging involves placing deposits into an investment at regular intervals over a period of time, regardless of whether the market is moving up or down, so as to average the price of the investment. Obviously this strategy is questionable given that portfolios using this strategy have fallen heavily since 2007. Furthermore investors and professionals practicing this technique have subjected their investments to a higher level of risk, which is exactly what they were trying to avoid.
In my opinion adding to an investment that is falling in value should be avoided at all costs. If you must add to an investment, only do so when it is rising and only if your original purchase and any subsequent purchases are in profit by at least 10%.
Remember wise investing is about taking the least amount of risk to gain an appropriate return, therefore when managing your investments you should always look to reduce risk, not increase it as dollar cost averaging does.
So what can we expect from the market?
Markets always test previous highs and lows, and I believe the current down move on the market is simply a test of the previous low. If this is correct, we should see price hold above the low of 3201.5 achieved on 21 November, before it moves up in the next bullish run into May or June 2009.
That said nothing in the share market is guaranteed and it is still possible the market may fall to below 3000 points with its next support level around the low of 2666 points achieved in 2003. It is for this reason why I advocate it is essential to wait for confirmation of a move before making a decision to enter into the market. Right now many investors are buying shares because they believe they are cheap, which is a very high risk strategy. Until the market confirms a direction, investors should avoid making any decisions. Remember, patience is the key.
Until next time
Good luck and profitable trading
Dale Gillham
Chief Analyst
