Recent developments in the world economy have investors worried, and the poor performance of stock indexes over the past few weeks is proof of their concern. The recent debt crisis in Europe has cast doubt over that region’s economic outlook, while the US economy showed signs of weakness in the first half of the year – fuelled by several factors including the debt talks that narrowly averted a disaster in the world financial markets. At the same time, worries over China’s economic growth and inflation problems are fuelling concern over the regional economy in Asia.
With so much negative sentiment abounding, some investors have taken flight. By disposing of equities and ploughing their funds into gold or government bonds they gain a feeling of safety, but is this the wisest approach? While some may see the current economic situation as too risky, others will use it as an opportunity to snap up shares at a great discount. When the markets turn upward, these investors will be well rewarded!
If you have some extra cash that you’d like to invest each month, an excellent investment strategy to employ is Rand-averaging. Based on the concept of Dollar-averaging, this strategy allows you to invest a fixed monthly amount in shares – favouring your chances for great returns in times of uncertainty.
Simply put, to take advantage of Rand-averaging you would need to invest the same amount of money each month in shares and equities.
Assuming you invested R500 a month in shares, you would get more shares for your money when prices were low and fewer shares when prices were high. This strategy ensures that you invest a manageable amount each month, and also prevents you from over-investing in overpriced shares while allowing you to buy under-priced shares that will gain value in the long run.
Over time, every crisis comes to an end and markets recover. To take advantage of this fact, speak to your financial advisor about including Rand-averaged investments in your portfolio.