Managing your KiwiSaver account: The beauty of dollar cost averaging
07 October, 2015
In last month's newsletter we wrote about the recent market volatility and how to think about the ups and downs in the context of your KiwiSaver account. This month, we continue with that theme and explore the concept of dollar cost averaging.
Market volatility can promote some unusual behavior among share market investors. Some see it as a great opportunity to buy shares and try and time their entry into the market to maximise returns. Other investors get nervous about losing money and sell their investments, turning a paper loss into a real loss.
In our experience, chopping in and out of the market, trying to get the timing right is fraught with danger. For most of us, we can't possibly know when the "right" time to invest is. A good way to reduce the risk of getting the timing wrong (especially in volatile times) is to invest smaller amounts on a regular basis.
One of the great things about the way KiwiSaver was set up is that it provides that discipline to keep contributing regardless of what the market is doing. Most KiwiSaver members will benefit from dollar cost averaging due to making regular contributions from their pay or via direct debit. This means you are always "buying" and are able to take advantage of dips in the market smoothing out your investing returns.
We can look back in history to 2011 and 2012 when markets went through a patch of volatility on the back of fears the US Federal Reserve would slow down its Quantitative Easing program or the "taper tantrum" as it was commonly referred to. At the time it might have been scary to see prices falling but as the following table shows, those people who were making regular contributions ended up buying "more" units which has been well rewarded over subsequent years without them having to worry about whether they timed it right.
|Date||Growth Fund Unit Price||Contribution||Units Purchased||Total Value|
|Value if investing on day one||$ 1,143|
|Value if investing using dollar cost averaging||$ 1,241|
|Value if investing on last day||$ 1,200|
Disclaimer: While actual unit price data for the Fisher Funds KiwiSaver Scheme Growth Fund has been used, this is a hypothetical example and each individual's experience will vary depending upon when their contributions were invested.
If you are self employed or not employed and want to take advantage of the government's $521 member tax credit each year, you can set up a regular direct debit. As well as ensuring you maximise this incentive, it also means you don't have to find $1,042.86 each June to top up your KiwiSaver account.