How frequently should I buy shares?

How frequently should I buy shares?

So, you’ve decided you would like to make a start on your personal investing journey. You’ve set aside some money to invest in the share market, done your research, and identified a few shares that you would like to buy.

One of the first questions you might naturally wonder about is how frequently should you add more shares to your portfolio?

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How often should I be investing?

Should you invest all your money in one go, and take a buy and hold approach? Should you keep your money in reserve and try to buy the dips when they occur in the market? Or is it better to invest smaller sums of money regularly over a longer period of time (a strategy referred to as dollar-cost averaging, or DCA)?

In this article, we will look at these different investing styles and help you determine which one might be right for you.

Time in the market is better than trying to time the market

New investors tend to put too much focus on trying to time the market. They often feel pressure to wait until the perfect buying opportunity presents itself (when a company’s shares are trading at their absolute cheapest). It’s an entirely natural inclination – none of us like feeling as though we’ve overpaid for something. But in reality, timing the market is incredibly difficult – even the best fund managers can’t do it regularly!

A DCA approach, on the other hand, tries to take all the guesswork out of timing the market, instead suggesting that time in the market is the best and most dependable way to generate long-term, stable returns. 

Investors who follow this investment strategy break up the total amount they would like to invest into smaller chunks. Then, rather than investing their money all in one go, they invest these smaller portions at regular intervals, averaging out their purchase price over time.

This investing method is particularly easy for beginner investors to set up because it doesn’t require an in-depth understanding of the market. There’s no need to keep up to date with all the latest financial news – you can simply set and forget and watch the value of your investment grow over time. 

In fact, time is the key ingredient in a DCA strategy. While it may not guarantee you short-term profits, if you have the discipline to commit to it over the long term, DCA can be a powerful generator of wealth.  

DCA versus buying the dip

It’s important to highlight that, when following a DCA strategy, investments are made at regular intervals regardless of how the market is actually performing. It doesn’t matter if the market is up or down, you would still make your regular investment. This is in contrast to investors who try to buy the dip, which refers to the practice of waiting for pullbacks in a company’s share price and buying when it is cheaper than its long-run trend.

Buying the dip is a good example of an investment strategy that relies on investors being able to time the market. This is because investors who follow this approach are looking for opportunities to outperform the returns of the overall market by making predictions about what a company’s share price might do in the near future. 

If the company’s shares have just declined, investors who buy the dip might see this as an opportunity to purchase shares, based on their prediction that the company’s share price will soon recover to its previous levels. If their prediction turns out to be true, they will have magnified their gains by buying shares at temporarily discounted prices.

As with any strategy that relies on trying to time the market, the downside to buying the dip is that it requires a great deal of skill and investing knowledge (plus a healthy dose of luck) to implement it successfully. You need to be able to correctly identify moments when a dip in share price is only temporary and isn’t a sign of deeper problems with the company’s underlying business. If the dip in share price turns out to be the beginning of a longer-term downtrend, you might risk losing a lot of money!

Research suggests that DCA tends to outperform even the most perfectly executed buy the dip strategy. This is due mainly to the fact that, while buy the dip investors are waiting around for the opportune moments to invest, they are potentially missing out on months and months of compounded returns

For example, if we were in a long-term bull market, there may be very few genuine dips in share prices. But this wouldn’t stop DCA investors, who would continue to regularly accumulate shares regardless of what the market was doing. 

And chances are they would come out on top because the money they invested earlier in the bull run would have already been compounding over time (instead of sitting in a bank account earning a pittance in interest). In short, if you invest regularly, rather than sporadically, you are putting your money to work faster.

Taking the emotion out of investing

The other benefit to DCA is that it takes a lot of the emotion out of investing. Investors who focus too heavily on timing the market tend to take it personally when their timing is off. Imagine you had waited for what you thought was the perfect buying opportunity, only to see your investment decline a further 10% immediately after you finally decided to buy. You might start to doubt your investing skills and abilities, which can then cause you to make bad, panicked investment decisions.

However, because DCA doesn’t hinge on your ability to perfectly time the market, you don’t need to be so concerned about short-term movements in share prices. The whole idea behind DCA is that these short-term price fluctuations will average out over time, just as long as you keep making your regular investments. So, with a DCA strategy, you can stop losing sleep worrying about daily swings in your share portfolio – it will all even itself out in the end!

Don’t pay excessive brokerage fees

The main thing to be cautious of when implementing a DCA strategy is brokerage fees. These are the fees a broker will typically charge you for processing a transaction. The amount of the fee can vary quite substantially between different brokers and may also increase with the amount invested.

For example, Commsec charges a $29.95 brokerage fee for standard online trades through its platform, which increases to 0.31% for individual trades totalling $10,000 or more. As you can imagine, if you’re paying almost $30 a pop every time you invest, these amounts can add up quite quickly, and start eating into your overall returns. This is particularly true if you are making many small, regular investments.

Let’s say you wanted to invest $500 a month for the next six months. Each time you invest, $29.95 is being put towards paying your brokerage fees. As shown in the below table, these fees alone add up to $179.70 over the course of six months – or almost 6% of the total amount invested. This essentially means that, just for your portfolio to end up back in the black, it needs to increase by at least 6.37% (from $2,820.30 back up to $3,000).

 

Time

$ Paid

$ Brokerage Fee

$ Amount invested

% Fee

Month 1

$500

$29.95

$470.05

5.99%

Month 2

$500

$29.95

$470.05

5.99%

Month 3

$500

$29.95

$470.05

5.99%

Month 4

$500

$29.95

$470.05

5.99%

Month 5

$500

$29.95

$470.05

5.99%

Month 6

$500

$29.95

$470.05

5.99%

Total

$3,000

$179.70

$2,820.30

5.99%

There are now plenty of different online brokers to choose from, some of which charge much lower brokerage fees. However, the principle still holds – always be wary of the amount you are paying in fees and keep this in mind when deciding how much and how frequently you would like to invest.

Consider this. If we invested the same total amount as in our previous example, but instead of investing $500 every month we invested $1,000 every two months, this would have a substantial impact on the amount we pay in fees.

Time

$ Paid

$ Brokerage Fee

$ Amount invested

% Fee

Month 2

$1,000

$29.95

$970.05

2.995%

Month 4

$1,000

$29.95

$970.05

2.995%

Month 6

$1,000

$29.95

$970.05

2.995%

Total

$3,000

$89.85

$2,910.15

2.995%

In the above table, we have still invested $3,000 in total, but the amount we’ve paid in fees has halved to $89.95. Similarly, the percentage of our total investment consumed by fees has halved to 2.995%, and our portfolio only needs to increase by 3.09% in order to break even. 

By changing our investment frequency, we have significantly reduced the amount of cash we’ve paid out as fees, as well as the burden they’ve placed on our overall portfolio. We have still invested the same total amount of money, but we’ve just conducted fewer transactions.

It’s important to have these considerations in mind when deciding how you would like to invest. It can be difficult when you are also trying to diversify your investments, but striking the right balance between your investment frequency, investment amount, and fees paid is a key step in setting up a successful, long-term investment strategy. 

If you want to follow a DCA strategy but are struggling to make regular investments while also diversifying, perhaps consider whether some exchange-traded funds (ETFs) may be a better choice for your portfolio than investing in individual companies, as ETFs provide instant diversification in a single transaction.

Find the right balance for your investment frequency

If you choose to follow a DCA approach, it is important to set up an investment frequency that best suits your own personal circumstances. As we’ve just demonstrated, investment frequency can also impact the amount of cash lost to fees, so it’s important to strike the right balance. 

Ideally you would want to be investing reasonably frequently (perhaps once a month) in a diversified portfolio, but without losing excessive amounts to fees. If striking the right balance feels tough, some online brokers and micro-investing apps charge much lower brokerage fees and can provide alternative ways to invest small amounts at a lower cost, while still diversifying.

Always make sure that you are honest with yourself about how much you can afford to regularly invest. Adopting a DCA investment approach requires patience and discipline, as wealth accumulates over time. You won’t get the full benefit of this approach if you are constantly having to withdraw funds from your share portfolio to cover your daily expenses.

Therefore, always choose a realistic amount of money that fits within your personal budget – while still remembering to keep some spare cash set aside in your emergency fund.

Guide last updated May 2022. 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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