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Dollar Cost Averaging

If you are looking to swap your hard earned money for an investment which rises and falls such as stock market funds, your biggest issue is often one of timing. If you buy your units when markets are high only to have them reduce in value, it will take longer for you to recoup your losses than if you had bought for a lower price further on down the track. If you delay, markets could rise further in the meantime. The difficulty is that the perfect time to buy is only ever clear in hindsight.

One way to reduce the risk of timing is to spread your purchases over a period by buying a series of regular smaller parcels. If the market drops you will be buying the units at ever reducing prices (which will give a lower overall total cost). If the market rises, you will still have bought some of the units at a lower price, again giving a lower overall cost than if you had delayed. This is called dollar cost averaging and it essentially takes the guesswork out of buying a fluctuating asset.

Kiwisaver funds normally already do this because most people contribute to them by regular instalments. But by making additional contributions regularly to a Managed Fund as well, you benefit from dollar cost averaging, get additional flexibility from an investment which allows access before you turn 65 and build a more respectable fund to help make ends meet in your retirement.

Mark Jones, AFA

Talk to Mark today!