Investing in the market can be a daunting exercise, and can leave an investor thinking - is the market at the top? The bottom? Or somewhere in between? Am I about to lose money or is the market about to go higher? Nobody can truly know.
There is a strategy that seeks to smooth out market volatility and reduce risk, which is called dollar-cost averaging.
If you are in KiwiSaver and regularly make contributions – then you’re already doing it.
Dollar cost averaging is an investment strategy where an investor invests regularly to reduce the impact of volatility over the long term.
Every time a KiwiSaver member gets paid by salary or wages, the member normally contributes a minimum of 3% into their KiwiSaver account to be invested by their provider. When that money is invested, it is used to purchase units in the fund or combination of funds the member has selected.
Some months, market performance may be high, and the price of the units that a member purchases may be higher - so a regular contribution may not buy as many units.
Some months market performance may be lower or negative and a regular contribution will buy more units.
When the market improves, the units purchased more cheaply will have earned more than those which were purchased at a higher price.
Charlie contributes $100 a month.
When the unit price moves down, this $100 contribution buys more units, when the price moves up, it buys less. Over the course of the year, although there were units purchased of higher and lower value, the units were purchased for an average of $1.02 over the course of the year.
As the unit price finished the year at $1.15, the units purchased at $0.90 have delivered a better return than if Charlie had invested a lump sum at the beginning of the year or when the units were priced at $1.10.
|Month||Contribution||Unit Price||Number of units||Total units held||Total value||Average unit price|
Dollar-cost averaging can be an effective tool within long term investments like KiwiSaver accounts, whether you invest regularly through salary and wages or make regular voluntary contributions. As people invest regularly it smooths the purchase price of the units held over a long period which may even out the highs and lows of the market.
If you have any questions, please contact the Summer team and we’ll be happy to help.
This is not a recommendation to buy or sell any financial product and does not take your personal circumstances into account. All opinions reflect our judgement on the date of communication and may change without notice. Past performance is not a reliable guide to future performance. We recommend you take financial advice before making investment decisions. We have prepared this web page in good faith based on information obtained from other sources, but we do not guarantee the accuracy of that information. We do not make any representation or warranty (express or implied) that this web page is accurate, complete, or current and to the maximum extent permitted by law disclaim any liability for loss which may be incurred by any person relying on this web page.