Volatility is a simple, but very important concept for a property investor.
Although property is generally regarded as a fairly stable investment, the recent changes in the market have brought to light the potential for property to have some volatility.
In order to control the volatility in your property investment portfolio, investors must look to strategies such as dollar cost averaging.
What is dollar cost averaging?
Dollar-cost averaging is a strategy to reduce the impact of volatility on your investments by spreading out the investment purchase times.
We don’t know exactly when the property market is on the top and the bottom or its cycle, and we only find out for sure once we pass that point. So, by spreading out your purchases, you are averaging the price you pay.
Beware the "expert" that can supposedly predict exactly when the top or bottom of the market will be.
Committing to a dollar-cost averaging approach means that investors avoid the risk that they will make counter-productive decisions out of greed or fear, such as buying more when prices are rising or panic-selling when prices decline.
Newbie investors think that timing the market to find the best deal always results in the best investment; it does not.
Spreading your investments over a period of time to average out the purchase price has a much higher probability of reducing volatility.
This means that you are probably going to end up buying some properties at a premium, but it also means you are probably going to end up buying some properties at a discount.
The result? You end up with an average price which allows the investor to take advantage of fluctuations in the market.
So why not just buy in the dip?
Dollar-cost averaging allows you to have more exposure to dips as they occur. No one knows where the bottom of the market is until it comes up.
The fundamental concept is, that time in the market almost always beats timing the market.
Property is a long-term investment so the difference in buying now or in 3-months will likely have little impact over the lifecycle of your investment if you’re in the market for 10+ years.
Let’s consider a real-world example:
Using the QV House Price Index, we can demonstrate how dollar cost averaging can save you money by purchasing at different points in the market. Here's how:
Average house price in New Zealand:
· September 2021 | $977,456
· December 2021 | $1,053,315
· March 2022 | $1,046,636
· June 2022 | $1,011,188
· September 2022 | $956,592
· December 2022 | $944,767
· March 2023 | $907,737
· June 2023 | $891,585
· September 2023 | $899,256
Over this period, the price changes hugely with big rises and big falls too. You can see here that the market is starting to come off the bottom between June and September 2023.
The result for investors who piled their money into a hot market is the potential pain of overpaying for investments.
Whereas, an investor that was savvier and split up their investments over different periods will be the one who tends to overpay less often.
In general, the property market trends upwards over the long term so averaging out your purchase price means you can ride the market expansions, increase your equity and reduce volatility.