One thing I’ve learned about share trading is that stock markets can be tricky. Sometimes they can make your timing of buying shares in a great quality company look a little bit mad, bad and dangerous. This is because you bought when the price looked good but for any one of a number of reasons the price dropped not long after.
In this article I want to tell you about a little stock market play called dollar-cost averaging, which can turn bad timing and potential losses into eventual wins.
I did this with shares I bought in one of our key companies called CSL. I bought in at a high price because all the research I’d done suggested that this was a quality company that was only going to get better and better. And then along came COVID and CSL’s share price took a bath! But keep reading because I did save myself!
I’d learned to use what’s called dollar-cost averaging to reduce my pain. It took a bit of courage because CSL isn’t a cheap stock. I took a deep breath and when I saw the stock in the doldrums I went in and bought more. They were much cheaper than the first batch purchased so my average price per share was reduced.
Some people actually commit to an investment strategy that’s called dollar cost-averaging where they divide up the total amount of money they want to invest over a number of months or quarters to buy a stock to deal with the volatility (or ups and downs) of the market.
In the Global Financial Crisis (GFC) of 2008, I held Macquarie Bank shares in my super fund with an average cost of $40. But when they fell to $22, I bought more. This brought the average dollar cost of the share down to $31. To get this number, simply add the two prices you bought the shares at i.e. $40 + $22 = $62. And then $62 divided by 2 (because you bought twice). This equals $31.
Macquarie’s now a $140 stock and I’m glad I dollar-cost averaged.
One word of warning and you really must take note of this: be very wary of dollar cost averaging a company that you don’t know much about because it’s share price might not recover and that could mean you’re simply losing more money.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.