How dollar-cost averaging can mitigate bear market risk

'Earlier investments appreciate, and you can buy more shares at low end to profit sooner'

How dollar-cost averaging can mitigate bear market risk

One good way to handle portfolios in this increasingly bearish market is to turn to dollar-cost averaging, according to one portfolio manager.

“I’m advising clients that dollar-cost averaging over the upcoming time period is one strategy to mitigate risk,” Graham Priest, an investment advisor with BlueShore Financial told Wealth Professional.  “Some clients have placed greater amounts in the past few weeks to take advantage of the drop in many stocks. But, overall, dollar-cost averaging is prudent.”

Dollar cost averaging means investors can average in their money over a period of weeks or months.

“By doing that, if the market rises higher, it’s beneficial because the earlier investments have appreciated in value. So, overall, you’ve been making more than what you would get if the funds were just in high interest savings,” he said. “On the flip side, if the market is to go down, as you’re investing over time, you’re buying more and more shares, or units of investment at lower prices. So, as the market recovers, you’re getting back to a break-even point or profit sooner.”

Priest weighs that against investors’ time horizon and risk tolerance.

“Depending on an investor’s time horizon and risk tolerance, we’re in an interesting period,” he said, noting that the S&P 500 has been down, and there’s increased turmoil and volatility, especially with the continually rising inflation and interest rates.

“For some investors, who are able to stomach more volatility and who have a longer timeframe, investing greater amounts over the last few weeks is a strategy that has been used to look for greater potential gains,” he added. “Other investors who are more risk averse might prefer to average in over a period of time. When you’re not calling a bottom right now, you’re investing over a number of weeks or months in anticipation there will be a recovery. So, not trying to call the exact bottom and just using the dollar cost averaging is a process to mitigate risk.”

Priest encouraged investors to get into the market now, when energy, materials, precious metals, such as gold, and different real estate investments are a good hedge against inflation. There are also a lot of large cap quality technology companies that are priced very attractively now and poised to do well for long-term growth.

Dollar-cost averaging is also a useful strategy for contributing to registered retirement savings plans or moving money from savings accounts to investments. It’s better than trying to guess the bottom, especially now that the central banks’ plan to raise interest rates has already been priced into the market as has the fact that inflation is turning out to be stickier than what was originally forecast.

”Dollar-cost averaging can always be considered, but it’s particularly helpful in times like this or when someone has a windfall or large sum of cash to invest,” said Priest. “Instead of placing everything at once, if those purchases are spread out over a period of time, then it’s going to spread out the risk and give the investor greater odds of catching the bottom. If the bottom is behind us, then at least you know that the amounts they’re investing in the earlier stages are appreciating in value, and the investor is making more than if they just had cash on the sidelines.

“Dollar-cost averaging and staying the course is something that will bear fruit,” said Priest. “If you look at more than 100 years of data on the stock markets as a guide, you’re well served to buy quality and stay the course.”