The economic impact of coronavirus has seen share market values plunge during recent times. This means there may be opportunities for investors to snap up a bargain, provided they do their research.
For first-time investors, deciding where to put your cash can be daunting, especially while the market is still volatile. The best thing to do when getting started with share trading is to learn more about investment strategies you can follow when entering the market.
Two approaches that are popular among first-timers include dollar cost averaging and lump sum investing. Not sure which one is right for you? We take a look at some of the pros and cons of each below.
Dollar cost averaging
This is a simple strategy where you invest a set amount at regular intervals. For instance, you might choose to invest $300 per month into a managed fund, with an initial unit price of $10. This initial investment would buy you 30 units.
Depending on fluctuations in the market, unit prices will either rise or fall. Because you’re only investing a set amount each month, you’ll be protected against sharp drops in the market and can grow your portfolio at a discounted valuation. On the flip side, if the market begins to climb, you can still enjoy some of the benefits with your existing investments. This makes dollar cost averaging a good strategy for investors with a lower risk tolerance.
- Lower risk. If you invest your money all at once, you run the risk of investing at a bad time, like right before a market crash, although you won’t get the full benefit of an upswing if you were lucky enough to get in at the exact right time.
- Reduces the emotional component of investing.By investing a set amount each month, you continue on a preset course, regardless of price swings.
- You’ll need to do your research.You’ll still need to determine what you think is a good investment, even if you opt for a passive approach.
- Less diversification. If you opt for this strategy, you are generally sticking to a consistent set of investments.
Lump sum investing
Rather than invest small amounts over a longer period of time, you might choose to invest a lump sum on a particular day. So rather than invest $300 per month for a year, you might choose to invest $3,600 at once. You can spread these funds across multiple companies or a single portfolio of Exchange Traded Funds (ETFs).
- You can stockpile cash until the time is right.
- Potential for bigger long-term rewards if you are able to buy low.
- More vulnerable to risk. All your money is at stake if there is a downturn.
- No one can predict the future. Even professional investors make the wrong calls. As a beginner, it can be especially hard to predict which way the market is heading.
There is no one-size-fits-all approach to investing, nor is there a secret formula for maximising your return. The best path forward can be determined through research, knowing how the different types of investments work, and understanding what strategy works best for your personal situation and risk tolerance.
Bessie Hassan is a money expert at Finder