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For a lot of investors, new and seasoned, this market crash feels different. That’s because it’s been caused by a global pandemic; Covid-19. Previous market falls and recessions have tended to come from financial crises or the bursting of property bubbles.
However, with a pandemic we are arguably in unchartered territory as investors. Yet, that doesn’t mean we should stop investing. Eventually, this pandemic will be brought under control. In the meantime, we should continue to put money to work.
How do you do that when the market keeps falling? Identifying the stocks that you believe will still be around and doing well in five, 10 or 20 years’ time is the first step. Secondly, and perhaps just as important though, is to be periodic about how you invest.
Here’s why I think investing monthly, which has always been a good idea, is even smarter in today’s current environment.
Dollar cost averaging options
The term “dollar cost averaging” applies to investing on a regular basis. So, instead of purchasing stocks in a big lump sum of cash, you feed your capital into stocks every so often.
For most people, that means on a monthly basis. If you can set aside a certain amount of money aside every month (for example, when you are paid your salary), it’s a solid start.
However, other investors may want to buy a certain amount every two week or, say, every Monday. How exactly you dollar cost average is up to you but it helps smooth out the volatility of the market.
Timing the market never works
One of the major reasons to dollar cost average is that buying in one big lump sum can mean buying at or near the top of the market. Of course, you could also buy near the bottom.
For example, some days this month have seen extreme volatility. Yet, buying at the bottom of the market is nearly impossible to time. In fact, no one even knows if we’re near the bottom right now.
A common saying is that “markets hate uncertainty” and how this global pandemic will play out doesn’t get any more uncertain.
By giving yourself the option to have a small amount invested into the market every so often, you give yourself an effective “hedge”.
This means you can have peace of mind. No matter what, you will be investing into your favourite stocks the same day every week, month, or quarter.
Even with all this volatility in markets, investors should remember one thing: you’re buying businsses. Many of us lose sight of the fact that we are buying into a business when there’s a downturn.
Watching a stock price go down and viewing it purely as a “number on a screen” is the wrong way to look at it. We should stay cognisant of whether the companies we own will still be thriving after the coronavirus pandemic subsides.
Until then, investors should remain disciplined and keep buying into your favourite companies on a regular basis.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.