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Wednesday, January 18, 2012

Smoother sailing on the investment high seas

There is no doubt that 2011 was a tough year with many investors finding volatility in the sharemarkets woefully challenging – the US debt debate, revolts in the Middle East, Greece’s near economic collapse, the European debt crisis, the threat of another recession in the US and fears of a Chinese slowdown all played a part in making the year a very bumpy ride.

So is 2012 a good year to invest? Choosing the best time to invest is notoriously difficult. Even the world's best economists don’t always know when markets are heading up or down.

There may be a way to safeguard yourself from investing your money at the worst possible time - it's called “dollar cost averaging.”

Dollar cost averaging is simple strategy with a lot of power - basically, all you have to do is invest a set amount of money at regular intervals, for example $100 at the start of each month.

This takes the stress out of trying to time the market by smoothing out your investment over time.

One month you may buy $100 worth of shares at $10 each, the next month the price could be $9.50, and the next month $9. This means you attempt to mitigate the risk of buying all your shares at an inopportune time.

With this strategy you can worry less about investment prices day-to-day and chopping and changing your plan based on investment tips from neighbours and taxi drivers.

While this may sound like a simple, almost intuitive concept, when left to their own devices most investors appear to have the seemingly bad habit of buying more shares when prices are high, and less when prices are low.

This might be human nature. When markets are booming and investors are happy, everyone wants a piece of the action. But when markets are falling, people panic and tend to want to put their money somewhere 'safe' while markets recover.

Unfortunately this “human nature” means many investors miss out on the opportunity to buy shares when they are effectively on sale, and even worse miss out on the big gains that can be made when markets recover.

Dollar cost averaging cuts out the emotional element to investing - replacing irrational spur of the moment decisions with a thoughtful long-term investment plan that will see you building wealth consistently over time.

With market volatility high and so much noise in the press about the state of the economy, now is the perfect time to take the emotional elements out of investing and get your investment plans back on track – whether that’s setting yourself up for your ideal retirement or lifestyle goals such as buying a new house.

For more information about dollar cost averaging and getting your financial wellbeing on track, call Hugh Kilpatrick* on 03 9471 0080 today.
*Hugh Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125), Australian Financial Services Licence 238429. This article does not consider your personal circumstances and is general advice only. You should not act on the information provided without first obtaining professional financial advice specific to your circumstances.

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