Dollar Cost Averaging 101

Volatile financial markets can be scary, but for superannuation investors, a concept known as Dollar Cost Averaging can actually make volatility a good thing!

It’s easier to show how this works, than explain it. Here’s an example of investing $250 a month for 12 months into a hypothetical managed fund.

Month Unit price Units purchased Amount invested
1 $3.00  83.33 $250
2 $2.80  89.29 $250
3 $2.50 100.00 $250
4 $2.60  96.15 $250
5 $2.10 119.05 $250
6 $1.98 126.26 $250
7 $2.30 108.70 $250
8 $2.45 102.04 $250
9 $2.80  89.29 $250
10 $3.00  83.33 $250
11 $2.95  84.75 $250
12 $3.00  83.33 $250
Total 1,165.52 $3,000

Value = $3,496.56

 

At the end of the investment period, $3,000 has been added to the portfolio, but because more units were purchased when the market was down, the investor has bought 165 more units than they would have if they had invested everything on day 1. At the end of the time the value of the investment stands at $3,496.56 ($1,165.52 x $3). This is a 16.6% return – even though the unit price has only come back to its starting point.

Dollar cost averaging doesn’t always provide the best outcome or generate a positive return. In a rising market, there will often be periods when it doesn’t pay off. In turbulent times, when markets are flat or declining, dollar cost averaging into a diversified managed fund may well be the sensible way to unearth those hidden bargains.

If you’re looking to learn more about how to invest or grow your super, talk to us here at AGS – we can help you put in place a plan to achieve your financial goals.

 


Published : 21 Jan 2022