Instead of trying to ‘time’ the market, you may be better off dollar cost averaging. Dollar cost averaging is an investment approach where you invest the same amount of money on a regular basis, usually monthly, into a share investment. It takes advantage of the only certainty of the sharemarket – that prices will continue to rise and fall.

Dollar cost averaging is a convenient and flexible way for investors to gain additional exposure to investments over time. The benefit of this strategy is that it reduces the risk of investing a large amount of money in a single investment at the wrong time.

By investing a fixed amount at set intervals, you are smoothing the ups and downs of the sharemarket. Your fixed amount will buy more units when the prices are low and fewer units when the prices are high. This means the average price paid can be lower than the average market price.

Adopt a regular savings plan

A savings plan is a disciplined method of investing and also an excellent way to benefit from dollar cost averaging. With a savings plan, a set amount of money is automatically debited from your bank account each fortnight or month. You could use a savings plan to save for your children’s education, a holiday, a new car, or for your retirement.  

Discipline is the key – not large sums

You do not need a large amount of money to be a successful sharemarket investor. What is important is making a commitment to a regular savings plan.

Example - Dollar cost averaging

Jim establishes a dollar cost averaging plan. He invests $200 per month in XYZ, a listed Australian company, for 10 months (Column A).

Jim’s regular investment is made at the same time each month. Each month, the market price of XYZ shares has varied (Column B).

This affects the number of shares that Jim receives for his $200 investment each month (Column C).

The average price you pay per share can be lower

A	B	C
Regular monthly investment	Market price of XYZ shares each month	No. of XYZ shares received each month
$200	$10	20
$200	$9	22
$200	$7	29
$200	$6	33
$200	$6	33
$200	$6	33
$200	$6	33
$200	$7	29
$200	$9	22
$200	$10	20
Total $2,000	Average $7.60	Total 274

Source: Perpetual. Does not include transaction costs eg brokerage.

Outcome
Jim has purchased 274 shares for $2,000 over ten months. The average price of XYZ shares Jim purchased is $7.29 (equal to $2,000 divided by 274). This is less than the average market price of XYZ shares, which is $7.60 (average of Column B).

By making smaller, regular, investments Jim has purchased more shares overall for a lower price.