By Robin Bowerman, Head of Corporate Affairs, Vanguard Australia
Making regular investments of smaller sums of money is one of the best ways to achieve an ambitious financial goal without feeling daunted by the task ahead. It can also help keep you on track so you can reach your goal faster.
Setting up automatic investments on your brokerage or fund platform is an easy way to ensure you contribute regularly whilst removing the pressure of deciding when to make each investment.
Not only do automatic investments simplify the process, it also discourages risky investment behaviour such as market timing or following the crowd.
Automatic investments of the same amount of money each time is also a great way to implement the 'dollar-cost averaging' strategy and in many ways simply replicate what your workplace super contributions are doing but with the advantage that the money can be accessed for personal goals – house deposit, holiday, education expenses – compared with super which is locked away till retirement.
The price of ETFs and shares will fluctuate as markets rise and fall, which means the investments you have will have been purchased at different prices because they were bought at different times.
This is a good thing because when prices are up, you'll buy fewer of them. When they're down, you'll buy more. Overall, this strategy will lower the average entry cost into specific assets over time.
While lowering the cost of investing is certainly a positive, the most powerful reason to practice dollar-cost averaging is that it encourages discipline and removes any behavioural biases or emotional factors when it comes to investing.
Investing based on emotional instinct, be that greed or fear, is dangerous. It can be easy to fall victim to market cycles – particularly during periods of volatility – and either panic-sell when markets dip or become overweight in particular asset classes when markets boom. Such actions can be detrimental to your long-term investment goals.
Below is an example of how dollar-cost averaging can build up investment balances over time, assuming you have $5000 to start with, set weekly contributions over a 10-year period and achieve a 6 per cent average annual return including distributions.
|Weekly contributions amount||Balance after 10 years|
As illustrated above, regularly investing smaller amounts can go a long way in accumulating wealth without you having to be overly concerned by what the market is doing.
For those wishing to invest over the long-term or need a strategy that is low-touch and low-fuss, dollar-cost averaging may be the answer. Just be mindful of brokerage platform fees as some may charge a fee for every investment.
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