You may have heard of the quote “it’s not about timing the market, but about time in the market”. In essence this quote highlights how most people can’t beat the market by constantly entering and exiting the markets when they feel the general market sentiment changes. Not to mention that everyone is quite busy organising their life and having to think about markets daily would consume a fair amount of time.
Dollar cost averaging (DCA) can be one solution to avoid timing the market and increasing your investment exposure. The DCA strategy allows you to keep things simple and invest a portion of your income or savings in small tranches over a predefined period. One common goal that Australians have is trying to ensure they can have a comfortable retirement and generally speaking, the earlier action is taken, the faster the investment will compound and ambitious goals can be achieved.
If we put some of these financial goals in the context of a DCA strategy you may be able to prepare without even thinking too much about it. By putting $100/week aside you’ll have saved $5,200 per year but this figure doesn’t account for potential market gains over a long-term horizon. Using the Australian Government’s MoneySmart Compound Calculator we can input a few assumptions. For instance, if we take the S&P500 market returns for the last 20 years which amounted to 9.87% and hypothesize similar results could be achieved over the next 20 years* with $100 deposited per week you would have $323,566 in assets. Now of course, with that said, it’s best to be a bit more conservative with anticipated returns (and future returns are never guaranteed) and unlike a bank account, markets can be rocky at times (like 2022) so don’t expect returns to be made evenly throughout the decades.
Another benefit that comes with DCA is that it’s possible to reduce those pesky spending habits that happen to the best of us. A lot of products in the market, including Unhedged, allow you to debit funds from your bank account on a schedule you choose and invest it into the app automatically. By having this happen without any manual intervention it may subconsciously make you reconsider splurging on that new set of kitchenware or takeaway order you probably didn’t need.
Given a DCA strategy is often best with long term investments you should consider a few other factors of the investment such as the fees associated with it and whether the investing method makes sense for your circumstances. At Unhedged, we have designed our product with a % based management fee so your balance won’t be eroded from fixed dollar fees to the point where you can’t benefit from the market upside over the long term.**
Ready to start your dollar cost averaging journey? Click one of the links below and you’ll be on your way to attaining some of those financial goals you’ve had in mind.
*Past performance is not indicative of future performance. If we assumed a 5% return it would be $178k in total assets using the other inputs.