Did you know you were a smart investor?
Investments | 23/11/2016 |
3 min read
If you are working and receiving or making contributions into your super account on a regular basis, you’re practicing an investing strategy called dollar-cost averaging. It’s a mouthful for sure, but it’s also one of the most time-honoured methods used by successful long-term investors.
While we wish we had a crystal ball, it’s not possible to predict the course of investment markets at any given time. So making one-off big lump sum investments can be a really risky strategy. You will look like a genius when markets go up; when they drop, not so much.
With dollar-cost averaging, your focus is on adding to your assets on a regular basis, rain or shine. This approach helps to take a lot of the emotion out of investing, and reduces the risk of making bad decisions – rather than attempting to time the market, you just chip away at making investments throughout the year.
So how does it actually work? With your super contributions, you keep buying additional units of your chosen investment option, usually once a month. If markets were to go through a dip, unit prices would come down, and you would be buying more units than you could the previous month. Conversely, when markets are up, you buy fewer unit. And so on.
We’ll illustrate this with a simple example, with annual contributions into super of $10,000, spread over just four quarters (rather than monthly contributions). During the year, markets dip, and the investment option is down by 30% at one point – a pretty steep decline.
Here’s what your contributions would look like – note that you buy units of our investment options, which are priced daily. We assume that at the beginning of the year, the unit price is $1.
||number of units
||The option is down 10%, but you can buy more units than the previous month.
||The option is down 30% from the first quarter, but your contribution now buys a lot more units than in the first or second quarter.
||The option gains during the quarter, on the back of improving markets. Your money buys fewer options than during the previous two quarter.
During the whole year, you purchased a total of 11,627 units of your investment option with your $10,000. However, the market value of these options is $10,464 at the end of the year. If you had made a one-off investment at the beginning of the year, your investment at year end would only be worth $9,000. So, by spreading your investments over the year, you actually managed to make some gains, even though it was a very difficult and volatile time. Of course, for a super member, such scenarios play out over and over again over many years.
The takeaway is that dollar-cost averaging helps to keep you on track with your investments. It’s a great way to stay invested over the long term, both through up and down markets. And for your retirement savings, patience and consistency – or time in the market, rather than timing the market – are two key ingredients for success down the road.
This article is provided for general information only. It does not take into account your personal objectives, financial situation or needs and should therefore not be taken as personal advice. You should consider whether it is appropriate for you before acting on it and, if necessary, you should seek professional financial advice. Before making a decision to invest in the Equipsuper Superannuation Fund, you should read the appropriate Equip Product Disclosure Statement (PDS).