ASX share market falls can be scary, but could dollar-cost averaging (DCA) be the answer?
To the inexperienced investor, the March bear market made for scary viewing. In fact, even experienced investors were spooked amid unprecedented market volatility.
While it’s good to buy undervalued ASX shares, you don’t want to fall into the trap of market timing. After all, ‘time in the market is better than timing the market’, as the saying goes.
That’s where a DCA strategy can come into your investment plans and help you think long-term.
What is dollar-cost averaging?
According to Vanguard Australia, DCA is “investing the same amount of money at set intervals over a long period – whether market prices are up or down”.
Essentially, dollar-cost averaging is the opposite of market timing. Obviously, ASX share prices will fluctuate over time. The good news is that if you’re using DCA to your advantage, you can buy more shares at cheap prices.
For instance, let’s say you invested $1,000 per month in Afterpay Ltd (ASX: APT) shares. When the Afterpay share price was trading at $40.50 per share in February that would net you 24 shares.
However, when the ASX tech share fell to its 52-week low of $9.99 in March, that same $1,000 would buy you 100 shares.
Is now a good time to dollar-cost average into ASX shares?
The simple answer is yes, it’s always a good time to DCA into ASX shares.
The whole point of dollar-cost averaging is to ignore market timing. By definition, if you pick and choose when to DCA, you are going against that whole philosophy.
Of course, what you invest in is a whole separate issue. You could continue to buy beaten-down ASX shares like Star Entertainment Group Ltd (ASX: SGR).
However, DCA is more common with passive investors looking to track an index like the S&P/ASX 200 Index (ASX: XJO). Where active investors like to buy undervalued companies, passive investors trust that the market will win in the long run.
ETFs don’t just have to track the whole market. For instance, the ETFS Morningstar Global Technology ETF (ASX: TECH) provides exposure to global technology companies and could be a good option for a DCA strategy in a tech-focused portfolio.
Using DCA can be a powerful strategy for both your own thinking and your investments. Rather than panicking in a bear market, you can think of it as a fire sale on your favourite ASX shares.
That means you can sit back, relax and enjoy the long-term investment journey.
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Ken Hall owns shares of Vanguard Australian Shares Index. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ETFS Morningstar Global Technology ETF. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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