This article has been written by expert contributor, Tony Kaye, Senior Personal Finance Writer, Vanguard Australia.
What’s dollar-cost averaging and how does it stack up over time? Read on to find out why it’s an easy and powerful way for investors to accumulate wealth over time.
If you’re a member of a managed superannuation fund, chances are you’re already benefitting from the long-term power of dollar-cost averaging.
But what exactly is it, and how does it work?
Think of it this way. Each time your employer makes a contribution into your super fund account it’s automatically invested by your fund according to the investment strategy that you’ve chosen.
That could be a balanced investment strategy, split evenly between shares and bonds, or perhaps you’ve opted to take on more risk by having a higher exposure to shares through a growth or high-growth strategy.
Behind the scenes your super money is most likely being directed into different managed funds, which typically invest in shares, bonds, cash, and other types of assets.
And here’s where the dollar-cost averaging part comes in.
While the amount of super you’re paid by your employer doesn’t change, your investment purchasing power does every time you receive a super contribution.
That’s because the prices of the assets you’re investing in change on a daily basis.
If the prices of the managed fund units your super fund invests in have risen since your last contribution, then you’ll effectively be purchasing fewer units (indirectly through your super fund) than you did last time.
Likewise, if the managed fund unit prices have fallen in value, you’ll be purchasing more units than the time before.
The only thing that’s constant is your dollar investment amount.
Forget timing markets
Similar to a regular savings plan, dollar-cost averaging simply involves investing the same amount of money at set intervals over a long period – whether investment prices move up or down.
Investors practising dollar-cost averaging automatically buy more assets when market prices are lower and fewer assets when prices are higher.
Over the total period that you keep investing, your average entry cost into specific assets will potentially be lower than if you’d try to guess the best time to buy in.
But the key benefit of dollar-cost averaging is not so much about the price you pay for securities each time.
Just like your super contributions, it’s about you sticking to a disciplined, non-emotional approach to investing that’s not affected by what’s happening on financial markets at any particular point in time.
It’s very useful in helping you to focus on your investment goals, ideally via an appropriately diversified portfolio, to give you the best chance of investment success over the long term.
Putting dollar-cost averaging into practice
So, how does a dollar-cost averaging strategy, using a combination of regular contributions, reinvestments of distributions, and compounding investment returns, stack up over time?
The table below is based on a starting amount of $5,000 and set weekly contributions over a 10-year period, with an average annual return of 6% including distributions.
How incremental investing can add up
| Weekly contributions amount | Balance after 10 years |
| $25 | $26,089 |
| $30 | $29,516 |
| $35 | $32,943 |
| $40 | $36,370 |
| $45 | $39,797 |
| $50 | $43,224 |
Source: Vanguard. Data as at 31 March 2023
Annual returns will vary over a 10-year period, in line with changing market conditions.
Over the last 40 years, the Australian share market has produced an average annual return of 10.6%.
Investment timing, the easy way
Auto Invest is an automated regular investment feature for exchange traded funds (ETFs) and managed funds on the Vanguard Personal Investor platform.
Auto Invest provides a simple automated solution for investors wanting to invest regularly.
Here’s how it works. You choose a regular amount of money (starting from $200) that you want to invest into one or a range of Vanguard ETFs or managed funds, and then decide how often you want to invest.
You can choose to invest into one or multiple funds of your choosing every fortnight, in line with your pay cycle, or every month or quarter.
Your regular investment amount is transferred to your Vanguard Cash Account each time by direct debit from your linked bank account, and then automatically invested into your chosen ETF and/or managed funds.
For example, you can invest $100 into one fund, and then two amounts of $50 into two other funds, to make up the minimum $200 regular Auto Invest amount.
Vanguard ETFs can only be purchased in whole units. Therefore, the minimum investment amount will vary depending on an ETF’s unit price on the date of purchase. Any residual (excess) cash from Vanguard ETF unit transactions is transferred into your Vanguard Cash Account and made available for your next Vanguard ETF Auto Invest order.
You can amend, pause or cancel your Auto Invest plan at any time.
Dollar-cost averaging provides a straightforward way for most investors to steadily accumulate wealth without being overly concerned by prevailing market volatility.
Making additional contributions and harnessing the power of compounding returns can make an enormous difference over time.
The earlier you start regular investing the more money you’re likely to have down the track to fulfill both your investment and lifestyle goals.
Tony Kaye is Senior Personal Finance Writer at Vanguard Australia. In his role, Tony regularly produces topical investment-related articles and educational content designed to help investors make well-informed decisions.
Tony is a former managing editor and financial journalist, and his articles are published in Vanguard’s weekly Smart Investing newsletter and elsewhere.
The above material has been republished with the permission of Vanguard Investments Australia Ltd.