You might have heard about Dollar Cost Averaging, but many will be surprised to know that most investors with a super account and some form of contribution going into the super account will be using this method.
So How Does It Work?
Dollar Cost Averaging is making periodic investments of roughly the same amount, into the same investment, regardless of the investment price or market conditions.
For example, if your employer pays your super monthly, your super fund will receive a similar amount each month. If your super is set up to automatically invest this money (which most are), it does not matter what the price of the investment is, the investment will be purchased.
The idea behind this theory is that instead of having a lump sum investment at a certain price, smaller, periodic investments change your entry points which can potentially help achieve a lower average cost base.
Let’s Look at an Example:
This example involves $1,000 invested into the Betashares Australia 200 ETF throughout 2020. Each investment is made on the first trading day of the month, and we have not factored in transaction costs or distribution payments.
As you can see, investing with a lump sum at the start of 2020 yielded a completely different result compared to the Dollar Cost Average method.
So when does Dollar Cost Averaging Work Best?
Does it work like this all the time? The answer is no.
Generally this strategy is beneficial when the market is falling and then rebounds quickly after a low. We saw this in effect in 2020 when Covid-19 caused a crash in the global stock markets before a huge rebound in prices over the proceeding months.
If the market is rising, this strategy is less effective because your average purchase price may continue to increase.
It is almost impossible to correctly time every market move. This strategy removes this worry in the belief that over time your average investment price will be an average of prices over a long-term period riding the ups and downs of market movements as it goes.
Want to learn more investment strategy tips and tricks? Call Hunter FP now for an obligation free chat about how we can help you get more from your investments!
*Before making any investment, we recommend you seek the appropriate advice. Past performance is not an indicator of future performance. Hunter FP has no affiliation with Betashares and has provided the above information for illustrative purposes only.