Making the most of volatility

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it," Warren Buffett says.

The recent boom and bust cycle we have experienced in our local bourses was largely fuelled by heavily leveraged investors looking for short term gains in a volatile market. For a while, all the talk was of spectacular gains, but of course when the market turned, the talk turned to dramatic losses for these speculators.

In this article in our investment fundamentals series, we talk about the advantages of investing regularly.

Dangers

Of course, this is a crude snapshot of the dangers of this kind of investing, but it does demonstrate the risks inherent in markets such as these. However, fluctuations can work to your advantage whichever way the market turns, if you consider one basic principle of investing in the stock market: investing on a regular basis.

By regularly putting money aside, you can benefit no matter whether the markets fall or soar.

- If the market goes up, the units you already own will increase in value

- If the market goes down, your next installment will buy more units.

Attempting to 'time' buying and selling decisions in the short term is a dangerous game, and one that very few professional investors manage to perform successfully on a regular basis. This is because markets are erratic - they can rise gradually over a number of days before suddently falling back and losing the previous gains.

Unexpected news, either specific to one company or the economy as a whole, can greatly influence stock prices in the short term. So considering this, how do you decide to invest in a volatile market?

Solution

A regular savings plan could be the answer. Investing regularly allows you to capitalise on a phenomenon called "cost averaging," illustrated in the table below. This compares the returns achieved by a lump-sum investor and someone who saves the same amount every month for six months.

The regular investor finishes the period with an investment that is worth more than that of the lump-sum investor - even though the initial unit price, final unit price and average unit price are exactly the same. It sounds unlikely, but it's true. Check the figures for yourself!

To make it even easier, managed funds by professional managers do the hard work for you by constantly reveiwng the market for the best opportunities and investing on your behalf.

Your adviser can help you choose funds that you might consider investing in and remember, you can't invest successfully if you don't invest at all.

- The writer is Director (Sales), Fidelity International, Dubai.