Investing In A Crisis: Dollar Cost Averaging And Why Quality Matters

by Infinity

It might seem illogical to keep investing in a crisis but if you’re lucky enough to be in a position to do so, you should definitely carry on.

The dollar cost averaging strategy of investing is one which is well-known to most of our clients if they have a sufficiently long investment horizon i.e. a decade or more. It is a very simple strategy which involves investing regularly – e.g. every month – no matter what the markets are doing. Even now, while we are in the midst of a global pandemic which has triggered record stock market falls in the past.

There are two aspects of the dollar cost averaging approach which are particularly reassuring when the investment landscape is bumpy. Because you have already made the decision to invest regularly over the long term, whatever share prices are doing, you don’t need to worry about whether you should be buying or selling. Your investment approach was decided expecting some rocky times so you can ignore the negative market noise and carry on just as you have been, sticking to your long term strategy.

The second positive is that while prices are low you will be getting more bang for your buck which means more gain when the natural cycle of the market triggers the inevitable upturn.

There is a proviso to all this though. Quality is key and you need to take extra care over your choice of investments.

We’ve been quoting Warren Buffett a lot recently but in the midst of a crisis, when we want to be minimising risk, it makes sense to take investment advice from someone who has been at the top of the game for a long time and seen just about everything the market can throw at us. So here’s another golden nugget:

If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.

If the stock market were to close down for a decade, would you still be happy to hold the investments in your portfolio or any new ones that you are considering buying?

If the equities or funds that you are holding and buying are/include good quality companies with strong cashflow, low debt and resilient business models then the answer is probably yes. These workhorses are the ones to go for right now. Conversely, companies that are over-indebted or heavily affected by the current market conditions, should be given a wide berth and, as ever, diversification is key to mitigating risk.

As mentioned above, if you do have money to invest, you may be able to take advantage of some seriously good opportunities because shares in some of the dependable stalwarts will have fallen simply because of money flowing out of the market as a whole and not because of profit warnings or other red flags. It’s a relatively safe bet that they will recover once this crisis is over and you can benefit from the upturn.

If you are unsure of how the investments in your portfolio rate according to these criteria, now might be a good time for a stock take to see whether they make the grade on the ten year test. It’s also worth taking a look at the overall balance of your portfolio to ensure that it is sufficiently diversified and that you have the offensive/defensive mix right to protect your assets in these volatile times.

For help reviewing your portfolio why not drop Alex a line? Our highly qualified consultants can give your investments the once over to ensure that you are in as good a position as you can be to weather the coronavirus storm.

Get in touch with Alex here or at alex.dewit.linkedin@gmail.com

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Tilney is an award-winning financial planning and investment company that builds on a heritage of more than 180 years. They have won numerous awards and their clients include private individuals, families, charities and professionals. They presently look after more than USD30 billion.

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Get in touch with Alex here or at alex.dewit.linkedin@gmail.com