In the days following a market collapse, investors – both new and experienced – look for reassurance. It’s a scary time for anyone who has a stake in the market. But that narrative can adopt a different tone quickly – often within weeks, but sometimes within days: What kind of investment opportunities do these lower market values present?
For the average investor (which is most people), the “buy low, sell high” mantra feels unnatural. During times of uncertainty, when the market drops and you can’t see the bottom, our instinct tells us to get out. “Escaping,” however, is an emotional response and may not be a sound investment strategy.
While it may feel like the worst time to begin investing – or to stay invested – the opposite can sometimes be true. Over the long term, buying cheap could mean less potential loss and bigger potential gains. Here are a few tips on what you can do to capitalize on a down market.
Take advantage of dollar cost averaging (DCA)
Dollar cost averaging is a simple long-term strategy that can be a great way to take advantage of dips in the market – smoothing out the peaks and valleys during times of volatility.
Here’s how it works. Rather than investing a one-time lump sum in a fund, dollar cost averaging takes a more methodical approach; it divides the sum into smaller amounts, and purchases shares over a period of time. This example shows the growth of regular $100 investments over 12 months, compared to a lump-sum investment of $1,200:
As you can see, making regular contributions of the same value means that you are able to buy fewer units of an investment when values are high and more units when values are low. In this example, applying dollar cost averaging was more beneficial.
Take note of performance
As a strategy, dollar cost averaging may perform best when there’s significant volatility. It provides a level of certainty that you’re not going to buy too high, or too low. When markets are flat and moving sideways, the outcome would be more comparable to a lump-sum investment. Meanwhile, a rising market will lower the purchasing potential, overall. It’s important to note that, for long-term investors focused on specific goals, there are benefits to all three of these market scenarios.
A hidden benefit of dollar cost averaging is that it takes the emotion out of investing, unlike the other two scenarios. It can reduce temptation to try and time the market, and it makes it much easier to stay the course on your chosen financial path. All you have to do is contribute regularly!
Having a plan and making regular contributions for the long term. That’s a simple formula for creating opportunity in a down market.
Take stock of what you have
For many, the idea of having “extra” money can seem impossible. After all, if people had excess cash lying around, there’d be a lot less worry about securing a better financial future.
To take advantage of downturns in an effective and less stressful way, you first have to find money to invest. Start by creating a budget, or by consulting the one you already have. It requires discipline, and may require some small sacrifices, but it can help you identify achievable and worthwhile goals. Some often-repeated, but sound, wisdom is to examine your need for those morning coffees at the drive-thru, which can add up fast. As does relying on takeout dinners. The list goes on.
Once you have a sense of your money situation, there are tools available – like the Budget Planner from the Financial Consumer Agency of Canada* – that can help you explore your options and get started.
Remember, while yours may seem like a small amount, a found dollar can go a whole lot further in a down market.
We can help
We can help you plan an investment schedule that works for your timeline, budget and lifestyle. Our goal is never to take the fun out of life and leave you without enough money. It’s to help you invest what you can, so you can enjoy life even more.
Talk to us today.