Financial markets have struggled the last few weeks. Worries over China’s slowing economy and the sharp drop in oil prices remain the main culprits. In this volatile environment it is more important than ever for investors to have a long-term perspective and stick to it. A strategy called dollar-cost averaging can help them take advantage of a decline in the value of equities.
What is Dollar Cost Averaging?
The strategy refers to investing a fixed amount in a security on a fixed time period basis. Let’s say you invest $100 in stock X on a monthly basis. If during the second month the price of X drops, you will be buying more shares for the same amount of money. And if the price recovers, you will end up sending less per share, on average, than if you bough the shares at the peak. By leveraging this strategy, investors essentially buy more shares at lower prices. This could translate in higher returns once the securities recover.
Business Insider looks at an example on how dollar-cost averaging worked brilliantly during the most recent crash. The graph below shows what would have happened to an investor putting $50 monthly into an S&P 500 index fund starting in October 2007 (a recent market peak). The value of the investor’s portfolio as of January 4, 2016, was $7,066. If he or she held the $50 each month in cash, he would have only $5,000. This simple strategy would have resulted in an impressive 41.3% return (4.3% annual rate of return).It is often difficult for investors to sticks with an investing plan when the market shows a significant decline. But when they do, their portfolio often ends up benefiting tremendously in the long run. The image below shows the investor’s portfolio return during and after the 2007 recession. Us, humans are incredibly averse to risk, and our tendency is to exit an investment plan during bad times. Abandoning an investment plan during bad months will also held us back from the potential reward once the market rebounds. So, an automatic investment tool such as iBillionaire Automatic Savings Plan is a good way to stay on track and not make emotional decisions when the price of an asset declines.
iBillionaire’s Automatic Savings Plan
The Automatic Savings Plan is an automated deposits tool that allows you to set up free recurring transfers from your linked bank account to your iBillionaire investment account monthly. You can choose to keep your funds as cash in your iBillionaire account or invest in a strategy automatically. The minimum auto-deposit amount is $100.The Automatic Savings Plan at Work
Last week we run a simple test to determine the benefits of this feature.
Our test shows that if you invested $100 monthly in our AGAF technology strategy since 2012 you would have increased your assets by almost 70% after 3 years. Based on the backtest, $100 invested from December 2012 to December 2015 in the AGAF strategy on a monthly basis resulted in $6,093 . Saving $100 in cash over the same period of time adds up to $3,600 only.
Time and time again, financial advisers ask their clients to stick to a long term investment plan and ignore the volatility in the market. More often than not, that strategy proved to be very successful. But when the market drops, people become emotional, and forget about the long term benefits. That is why it is our mission to help individuals invest better in tumultuous times by leveraging mobile technology .
Nothing in this communication should be construed as a solicitation or offer, or recommendation, to buy or sell any security. Financial advisory services are only provided to investors who become iBillionaire clients. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in loss.