Australian share prices have seen record highs in 2024 after a low couple of years.
If you had invested in an index fund or a portfolio tracking the ASX200 over the past year, you likely saw some growth in your portfolio. With the S&P ASX200 index climbing by just under seven per cent in the ten months to 31 October and closing at 8,160. It also reached its all-time high of 8,355 earlier in October too.
Over the course of the year, the index has ebbed and flowed, recording several all-time highs and some harsh notes in response to global events.
Geopolitical tensions have played a part in market uncertainty as the wars in the Middle East and Ukraine continue, along with debates about the future impact a Trump presidency will have on Australia.
Following Donald Trump winning the election, US share prices surged in what many saw as a positive reaction to the returning President’s policies. However, prices have since dropped in a typical market correction, and analysts are predicting future volatility as markets respond to the proposed policies, including tariffs and mass deportations promised by the President-elect.
These fluctuations often lead investors to rush to hit the ‘buy’ or ‘sell’ buttons – either trying to save further losses when share prices are falling rapidly or wanting to cash in on a rising market. Meanwhile, those with lump sums to invest may delay, trying to pick the time when prices are lowest.
Timing the market
It’s a strategy – known as timing the market – that may work for some, particularly if you need access to your investment in the short term. But, for mid-to-long-term investors, it’s generally accepted to be a little more risky.
Predicting the market movements is tough – even for experienced investors – because of the endless factors that can influence the markets.
Reacting to major market movements by selling or keeping a lump sum in cash until ‘the time is right’ means you run the risk of missing the market’s best days and reducing your overall return.
Countless studies show that better long-term results are achieved by consistent investing over time.
But, if you had missed the ten best days during that time, your total investment would be just $36,014.
Dollar-cost averaging
One way of removing the emotion and guesswork from investing is by using a strategy called ‘dollar-cost averaging’. This involves investing a set amount at regular intervals over time, no matter what the market is doing.
The strategy works best if you are investing over the medium to long-term because it helps to smooth out the price peaks and troughs. In fact, compulsory superannuation paid by employers is a form of dollar-cost averaging. Smaller, regular amounts are invested automatically, regardless of market movements, and over time, your investment grows.
However, the effectiveness of dollar-cost averaging when you have a lump sum in cash to invest is still debated. Some supporters argue that it reduces risk by avoiding the chance of making a large investment just before markets plunge. On the other hand, those opposed to the strategy for lump sum investing say that, with a lump sum sitting in a bank account as you chip away at regular stock purchases, there is a risk that you will miss the best of the market.
With lots to consider, contact your local Nexia advisers to help you analyse your investing strategy and develop a plan that works for you and your financial goals.
