The power of dollar-cost averaging

By Tony Kaye, Senior Personal Finance Writer

Build your investment portfolio

How regular investments and compounding add up to higher long-term returns.

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.

Dollar-cost averaging provides a straightforward way for most investors to steadily accumulate wealth without being overly concerned by prevailing market volatility.

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 $1,000 and set fortnightly contributions over a 10-year period, with an average annual return of 6% including distributions.

How incremental investing can add up

Fortnightly contributions amount	Balance after 10 years
$200	$72,834
$250	$90,587
$300	$108,341
$350	$126,095
$400	$143,848
$450	$161,602

^Source:^Moneysmart.

Annual returns will vary over a 10-year period, in line with changing market conditions.

The Australian share market produced an average annual return of 8.3% over the 10 years from 1 July 2014 to 30 June 2024.

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 ETFs 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.

Summary

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.

_{Important information and general advice warning}

_{Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer and the Operator of Vanguard Personal Investor and the issuer of the Vanguard® Australian ETFs. We have not taken your objectives, financial situation or needs into account when preparing the above article so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for any relevant Vanguard product, before making any investment decision. Before you make any financial decision regarding Vanguard investment products, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained at vanguard.com.au free of charge and include a description of who the financial product is appropriate for. You should refer to the relevant TMD before making any investment decisions. You can access our IDPS Guide, PDSs Prospectus and TMD at vanguard.com.au or by calling 1300 655 101. Vanguard ETFs will only be issued to Authorised Participants. That is, persons who have entered into an Authorised Participant Agreement with Vanguard (“Eligible Investors”). Retail investors can transact in Vanguard ETFs through Vanguard Personal Investor, a stockbroker or financial adviser on the secondary market. Retail investors can only use the Prospectus or PDS for informational purposes. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This article was prepared in good faith and we accept no liability for any errors or omissions.}