Shares - is now the right time to buy?
THE strong growth we've seen this year in the property market is attracting the lion's share of attention but Australian shares have also been posting noteworthy gains.
Despite a recent dip, the Australian sharemarket has been trending upwards since the middle of 2013, with the S&P/ASX 200 price index rising from 4656 points at the end of June to around 5350 as I write in November.
It's a good result for shareholders however experience tells me it's only when an investment market starts to rise in value that many other investors consider jumping in. As a result I'm frequently asked, "Is now the right time to buy?"
The answer to this is pretty simple. The 'right' time to buy shares is when you have the money to do so.
Many financial commentators and investors place great emphasis on making sure you time your entry into and out of markets correctly.
By correctly I mean buying when markets or a particular share are at a low point, and selling when the share reaches its high point. Anyone who can do this consistently will become extremely rich, but as any experienced investor knows, it's much easier said than done.
That's why I'm such a big fan of dollar cost averaging. It's a buying strategy that involves investing a fixed amount in the sharemarket (or other investment markets) at regular intervals. A typical example would be investing, say, $1,000 in the sharemarket on the first business day of every quarter.
The logic here is compelling. Firstly, dollar cost averaging is a disciplined investment regimen which gradually builds up your investment portfolio. Secondly it acts to average out the cost of the shares you buy even though the value of the underlying assets - and hence share price, may have fluctuated.
Quite simply, dollar cost averaging is a process that frees you from worrying about getting your market timing right. You just keep on buying regardless of the state of the market - up or down, and effectively grow your share portfolio at an average market price.
The easiest and most affordable way to go about dollar cost averaging is by contributing to a managed share fund or some other type of managed fund. It's a strategy that can let you save on the brokerage that would apply if you buy directly held shares, and it also takes the effort out of trying to decide which shares to buy - and when.
There is no doubt you can make a mountain of money with good market timing. The practical downside is that good market timing involves a lot of skill and probably an even greater amount of luck. Dollar cost averaging is something we can all do.
For more on sharemarket investing and dollar cost averaging, take a look at my book Making Money or check out my free e-book - 'Top ten keys to successful investing' at www.paulsmoney.com.au
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.