How Dollar Cost Averaging Helps you make more money in your KiwiSaver account
What if there was a way to time the markets perfectly - by investing more when the markets are at a low and investing less when the markets are expensive. Buy low, sell high!
Believe it or not, there is a very simple way to do this - it's called Dollar Cost Averaging.
What is it?
No, Dollar Cost averaging isn’t code for a new top-secret piece of software that can tell you the exact time to invest in order to make an optimal profit or avoid loss. But it can certainly help you to make a good return on your investments in the long-run.
Simply put, Dollar Cost averaging is the process of investing the same amount of money at set intervals over a period of time.
Let’s say your monthly contributions are $1000. If the price for one “unit” of KiwiSaver assets is $10, you buy 100, if it falls to $50, you buy 200 more with your next deposit. If it then rises to $200 your contribution will only buy you 50 units and so forth. Sometimes you will invest when the market is in a slump just before it rises (buying at a discount) and other times you will invest during a market peak which could see a drop in value shortly afterward (buying at a premium). These different purchase prices should cancel each other out in the long run creating a much more consistent annual return.
The market generally moves up and down in an unpredictable fashion. But history has shown that in the long-term all of those changes are part of a much larger, gradual upwards curve in the value of the market as a whole. So a general rule of thumb is to invest with patience and you will see a return in the long run.
Volatility is your friend
Below illustrates an example of your monthly KiwiSaver contribution when placed in either a volatile or non-volatile market. Notice how the volatile market usually sees more fluctuation in price each period.
The use of Dollar Cost Averaging can help you make the most of the market changes, especially in a more volatile market. Though both of these markets show a similar gradual increase over 6 months, choosing the more volatile option has allowed you to make a greater return by purchasing at a discount in the deeper dips and then gain a better return in the quick recovery. Your balance of $810 upon choosing to invest in the volatile market reflects by outperforming the non-volatile market by $22. Though this isn’t the case 100% of the time, you can see how Dollar cost Averaging can help you benefit from the more extreme market conditions.
How to get on board
The great thing about your investments in KiwiSaver is that you are already doing this! The regular contributions from your paycheck go straight into your KiwiSaver account. Your provider then buys KiwiSaver units using your contributions. Your contributions (which are deducted from your payslip every payday interval at a roughly similar value) means your KiwiSaver investment deposits are following the concept of Dollar Cost Averaging to the very letter. Your consistent additions are ensuring that you are actually benefiting from market volatility instead of getting hurt by it. So the best way to ‘time the market’ is to do nothing!
Of course, you want to make sure you are dollar cost averaging into the best fund for your needs. That’s where National Capital comes in.
We have created a really useful service to go about getting advice on which KiwiSaver fund will get you the best long term returns. We call it the KiwiSaver HealthCheck. Just take 10 mins to submit it, and we will do the rest!