In this article, we explore how Dollar Cost Averaging (DCA) can reduce risk caused by share market volatility and aid share value when you sell.
When buying shares using a DCA approach, it commonly results in a greater number of shares purchased overall. This is because share price fluctuations actually play to your advantage. That is, when investing a consistent amount of money regularly (say every month), you’ll buy more shares when the price is lower, but of course, less when the share price is higher.
However, what many people don’t realise is that DCA can be a very effective strategy for selling shares.
Rather than opting for a lump sum sale, the key is to implement incremental share sales over time, which is more likely to provide a better return for you.
You have a shareholding valued at $500,000 that earns $25k for every 5% increase in the share price. If you needed to realise cash from your shareholding, it may be better to sell in $25k increments rather than opt for a lump sum sale. If the market continued to rise at 5% you would have realised $25k in cash, yet only sold down the 5% increase. Had you attempted to sell the entire holding and time the sale, you could have received significantly less return, if you waited for, and missed the fleeting upside price.
Attempting to time the market, if you want or need to sell shares, often ends in disappointment.
This is because the peak price can be easily missed, with sellers only realising this difficult reality, when the share price drops, often suddenly.
Holding assets too long is another problem. In a rising market, sellers wait in the hope the price will go even higher. Unfortunately, what goes up must come down and that can happen in the blink of an eye.
Generally speaking, DCA makes the most of the upside and tempers the downside. Opting to sell an entire shareholding in one transaction brings with it a significant commitment that must be accompanied by an acceptance of the risk and an understanding that the outcome might not meet expectations and could prove more costly than you can afford.
Share prices can be unpredictable and unexpected external factors can cause significant impact on market conditions. Volatility often doesn’t favour a single transaction, but it does underpin DCA which both reduces risk and realises share value over time.
Take a moment to review your selling strategy and consider whether the time, pressure and risk involved in making these type of important (and valuable) money decisions enables you to sleep peacefully at night or keeps you awake.
Further, if you have an ESS, consider whether you are satisfied that your share portfolio provides the diversity necessary for delivering the wealth outcomes you need now and in the future. In our experience, all too often executives are placed in a personal wealth situation which is too reliant on the performance of their company share performance.
For more information about ESS, investment options and wealth strategies please contact Executive Strategies on +61 7 3007 2080 or email firstname.lastname@example.org
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Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.
*Please note: For advice and services relating to this matter that are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.