Normally, this would be hypothetical. But this time, I’m going to outline what I’m actually doing, right now, to invest $3,000 in the ASX.
First, Some Context
This strategy definitely doesn’t suit everyone and probably won’t be as useful for someone with an established portfolio. I’m a student, so I don’t have a lot of funds available. And, because I’m young, I’m still in the process of building a portfolio. I think this is the best strategy to get started.
I’m Buying An ASX 200 ETF
To be exact, I’m buying the BetaShares Australia 200 ETF (ASX: A200). Really, you could pick any ASX 200 ETF as long as the fees are low.
However, I haven’t just bought in one lump sum. I’m slightly apprehensive that the market could be nearing a top after a decade-long bull market, but I don’t want to wait and miss out on potential returns if I happen to be wrong. I’m not smart enough to pick the top or the bottom. That’s why I’m dollar-cost averaging, buying regular amounts at regular intervals.
Basically, at the end of each month, I’ve started putting a set amount into A200 and I will continue to do so until it becomes my largest holding (I have some other small holdings), forming the base of my portfolio.
There are some clear advantages and disadvantages to this strategy.
Advantages
Diversification: Buying an ETF provides exposure to a range of companies in different industries and sectors and provides protection against the failings of any one particular company.
It’s Easy: This is the easiest strategy you could possibly implement. There’s no need to spend hours researching individual companies, just make sure the ETF has low fees. I don’t try to time the market. I pick a day and make regular contributions.
Behavioural: One of the hardest parts of investing is the behavioural aspect; the urge to jump on a company that’s soaring or sell a company when the share price falters. Making split-second decisions or following hype can lead to some bad investment decisions. This strategy takes all behavioural tendencies out of the equation. While I invest in other individual companies that I think have potential, I don’t speculate with the core of my portfolio.
Disadvantages
Costs: Buying regular lump sums will force you to pay more in transaction fees. That’s why this strategy is only effective for buying companies you’ll hold for the long-term. I don’t use this strategy with my other shorter-term investments where the transaction fees would eat into profits.
Missed profits in a bull market: If the market is going up, you would make larger profits by investing the whole sum at the start. But remember the opposite is also true, and we’re not trying to time the market.
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Disclosure: At the time of writing, Max owns shares in BetaShares Australia 200 ETF (ASX: A200).
