One of the benefits of making regular contributions into your KiwiSaver account is that you get to take advantage of dollar cost averaging (DCA). DCA involves buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. As a result more shares or units are purchased when prices are low, and fewer are bought when prices are high.
DCA reduces the risk of investing in a single investment at the wrong time.
For example, you decide to purchase $1000 worth of shares in company X for each of the next three months. In April, X is worth $30, so you buy 33 shares. In May, X is worth $25, so you buy 40 additional shares. Finally, in June, X is worth $20, so you buy 50 shares. In total, you purchased 123 shares for an average price of approximately $24 each - a much better result than if you had invested the entire $3,000 at $30 a share.
As demonstrated above DCA can lower an investor’s overall purchase price of a stock, as well as minimise the risks associated with market psychology – including market-timing and panic buying and selling.
A lot of KiwiSaver members were unaware they were buying shares at the height of the GFC - just like Warren Buffet was – and similarly those shares have - as a whole - turned out to be great investments.
