Stay in the market and profit with this simple strategy

Stay in the market with the dollar-averaging strategy

This is one of the most common investment methods.

Darryl Daté-Shappard

I started investing after finding a copy of Peter Lynch's "Beating the Street" in the English book section of a library in Japan, where I was living at the time in 1997. Seeing that regular people can find investment ideas just as easily as professionals, I used the philosophy of that book to invest in stocks in Japan, and later in Australia after moving in 2001. I also have experience in property investing, and went on to complete my masters degree in Applied Finance at QUT in Brisbane. I follow the investment style of Peter Lynch, Phillip Fisher and Warren Buffett-- knowing what you invest in, doing your homework to keep up with a stock's story and holding a healthy skepticism of what the stock market calls "value".

Published February 5, 2014 2:00 pm AEDT

I love value as much as the next investor and I spend a lot of time reading business reports, finding out what companies are doing and looking over quarterly updates to glean insights about a stock. Because there are so many to choose from, investors can get a case of "analysis paralysis".

One of the easiest ways to grow profits is to use the dollar-averaging strategy. Since it's similar to saving money by tucking away a portion of your income into a bank account, it doesn't take a lot of brain power to keep on doing.

Here it is. You set a percentage of your income to be invested and you invest that same amount every month as if it was a regular expense. You have to choose quality companies that you believe will continue growing, this is not a method for speculators.

You could choose to invest in some stalwarts like Woolworths Limited (ASX: WOW), Wesfarmers Ltd (ASX: WES) or Commonwealth Bank of Australia (ASX: CBA) and even divide the monthly funds into as many companies as you can keep track of.

Fast growers like REA Group Limited (ASX: REA) and CSL Limited (ASX: CSL) have doubled their original share price many times over the past 10 years, but if you had doubled your money from an initial investment you may have been tempted to pull out and miss further gains. With dollar averaging you would have patiently increased your shareholding and the dividends would be coming in regularly as well.

If the share price goes up, you still invest the same dollar value of money, so you'll get less shares, but build up your investing discipline. When there's a sell-off you can buy more shares through the dollar-averaging method.

This isn't a buy and forget strategy. You have to diligently make sure that nothing major changes with the companies you dollar average with. If you have a salary increase along the way, you could raise the monthly amount, but the biggest, most important thing is to create investing discipline.

Foolish takeaway

With a portfolio of good companies and dollar averaging, you don't have to worry about market corrections. In some ways, you may start wanting them to happen more often so that you can get more shares in those quality stocks.

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