Understanding the power of dollar-cost averaging
If you’re a member of a managed superannuation fund, chances are you’re already benefitting from the long-term power of dollar-cost averaging. But what exactly is it, and how does it work?
Think of it this way. Each time your employer makes a contribution into your super fund account it’s automatically invested by your fund according to the investment strategy that you’ve chosen. That could be a balanced investment strategy, split evenly between shares and bonds, or perhaps you’ve opted to take on more risk by having a higher exposure to shares through a growth or high-growth strategy. Behind the scenes your super money is most likely being directed into different managed funds, which typically invest in shares, bonds, cash, and other types of assets.
And here’s where the dollar-cost averaging part comes in.
While the amount of super you’re paid by your employer doesn’t change, your investment purchasing power does every time you receive a super contribution. That’s because the prices of the assets you’re investing in change on a daily basis.
If the prices of the managed fund units your super fund invests in have risen since your last contribution, then you’ll effectively be purchasing fewer units (indirectly through your super fund) than you did last time. Likewise, if the managed fund unit prices have fallen in value, you’ll be purchasing more units than the time before. The only thing that’s constant is your dollar investment amount.
Similar to a regular savings plan, dollar-cost averaging simply involves investing the same amount of money at set intervals over a long period – whether investment prices move up or down.
The key benefit of dollar-cost averaging is about you sticking to a disciplined, non-emotional approach to investing that’s not affected by what’s happening on financial markets at any particular point in time.
The table below is based on a starting amount of $5,000 and set weekly contributions over a 10-year period, with an average annual return of 6 per cent including distributions.
Weekly contribution amount & balance after 10 years.
If you are interested in implementing this or you would like to speak to your adviser about this, please give us a call on 4771 3800 to book a time to speak with your My Fortress adviser.