Investing In Times Of Uncertainty And Volatility Part 3 – Investing When The Market Is Bad

Am I wasting my money investing when the market is so bad?

This is a common concern you hear from people that have been salary sacrificing (investing) into superannuation in a declining share market. They see contributions being taken from their salary each week but their superannuation balance (investment) is stagnant or even going down. Should they stop investing or put it in cash?

Dollar cost averaging.

The advantage of ongoing salary sacrifice is that you are “dollar cost averaging” into the share market. By this we mean that you are investing the same amount into the share market on a periodic basis however if the share market is declining you are actual getting more for your money, more units or shares, which will recover in value if they are quality assets.

Dollar cost averaging does require a disciplined approach. You must invest the same amount at the same time of the month regardless of whether the share market has gone up or down. If the share market has gone up you were able to have purchased some assets at a lower price but the if the share market goes down you are now able to get more quality assets at an even better price!

Buy when shares are on sale.

A good example is if you are shopping for a new suit or dress. You can go to your favourite store before Christmas and pay full price or wait until the Boxing Day sales and get the same suit or dress for half price. It is the identical article of clothing but it is now on sale.

This is the same as buying quality assets when investing during times of uncertainty and volatility. You are getting blue chip shares on sale. Values do return to quality assets.

The share market can move quickly!

One final point about being out of the share market at the wrong time. The market can move a large amount in a single day. Missing out on just a handful of these significant trading days can have a large impact on investment returns. Some of the biggest trading days in the Australian share market are listed below:

6.71% – 2 Jan 2000, 6.10% – 29 Oct 1997, 5.76% – 13 Nov 1987, 5.5% – 25 Nov 2008

There is no bell that rings at the bottom of the market. Missing the biggest half dozen “up days” in a year makes a significant impact on your investment return for that year.

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