Dollar cost averaging – slow and steady

Anyone who benefits from regular employer and voluntary superannuation contributions is already using dollar cost averaging. However, those with a lump sum to invest have a choice; putting all of their money in at once – or spreading the investment over a longer period.

You might think of it just like Aesop’s tortoise-and-the-hare. The lump sum investor – with one big sprint hoping for spectacular gain is the hare – versus the dollar cost averaging tortoise, investing steady amounts, slowly over time. It may not be the most exciting way to invest, but in an uncertain market, it is a long-term approach well worth considering.

See it in action

Back in January 2008 the markets had already fallen.

The hare: It looked like a good time to buy in at a cheap price, so Alice decided to put $12,000 into a balanced fund.

The tortoise: Bob was concerned that the markets could fall further but he wanted to be in a situation where he would benefit from any recovery in the markets. He decided to invest $1,000 a month into the same fund for one year.

Over this time the market fell further, so both Alice and Bob saw a drop in the value of their portfolio. The key point is that dollar cost averaging provided Bob with some protection against this fall. As unit prices dropped, Bob bought more units each time he contributed. Alice’s investment was $9,160.36 at the end of December and Bob’s was worth $10,114.48. Because Bob purchased more units in total for the same amount of money, his portfolio will increase more in value when the market recovers.

A regular investing plan works in both a falling and rising market by removing the emotion from investing and the temptation to try to time the market. It also brings discipline to your savings strategy.
The regular superannuation contributions your employer already makes on your behalf take advantage of this strategy. You can also reap the benefits by making your own contributions on a regular basis. If you currently have a salary sacrifice arrangement in place, or are contributing after tax, it is important to continue these regular contributions to take advantage of the ongoing benefits of dollar cost averaging.

Assumptions

Assumes contributions were invested in the Russell Balanced Fund on the 15th day of each month. Final dollar values as at 31 December 2008.