It’s at this time that Dollar Cost Averaging can help you. This is when you “drip feed” into the market by buying bit by bit, rather than all in one go. A simple way to do this is to set up a monthly Regular Savings Plan for your managed investment or an automated purchase order for your shares.
This approach means you don’t have to try and pick the bottom of the market or worry about when you should be investing.
There are two ways to achieve Dollar Cost Averaging:
- Sit on a sum of money you want to invest and put in a portion of it month by month; or
- Make regular monthly investments year on year through a savings plan
The effect of either approach is designed to smooth out returns over time. If you put everything in today, you face volatility from day one. But if you enter the market bit by bit, the way the market moves will impact on the capital gains and the dividends you receive. Because you’re buying at different prices along the way, there may be better value in the future. This strategy works best in volatile markets.
The built-in discipline of a regular savings plan is a simple and effective way for you to achieve financial independence. One of my clients a little over 12 months ago had no savings or investments at all. We started her on a regular savings plan and she now has over $7,000 invested that would otherwise have been frittered away.
The real value of dollar cost averaging is that the structure of a disciplined investment program like dollar cost averaging helps overcome that behavioural bias that wants to turn us into market timers.
How it Works – A hypothetical example
Let’s assume you make a total of ten $500 investments, as shown below.
As you can see, when the unit price falls, your $500 buys more units. So, during a falling market, this approach ensures you buy cheaply. In this example, your $5,000 investment will result in your acquiring 891.6 units over the period, which at the end of period will be worth $8,916. Which means your $5,000 investment has grown significantly* (most of it during a falling market), with a rising market in front of you. Compare that profit to the zero result you would have achieved if you had invested all of your money at the start of the falling market.
Take Advantage of the power of a savings plan by talking to us today.
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Source: Zurich Investments; afrsmartinvestor.com
In : Investments
Tags: "dollar cost averaging" "savings plan" investment "behavioural bias" discipline "regular savings"