At times like the present when we’re juggling high living costs, plans to invest can be put on the backburner. But the real cash squeeze can be felt further down the track when we find we have been missing out on compounding returns.
Fortunately, there are ways to maintain regular investing that don’t call for a large outflow of cash. Here are three options to consider.
1 Dollar cost averaging
Dollar cost averaging is an investment strategy chiefly designed to smooth out volatility. However, it can also be a way of maintaining portfolio momentum when cash resources are thinly stretched.
The idea is simple. You just invest the same amount at regular fixed intervals – monthly, quarterly or every six months. This little-and-often approach not only brings discipline to investing, it also averages out the cost of the shares you buy, so you don’t have to worry about getting your timing right. In today’s environment, dollar cost averaging can also be kinder on your wallet than investing a chunky lump sum.
As a guide to how dollar cost averaging works, let’s say you decide to invest $200 each quarter into an exchange traded fund. Its unit price, like all ASX-listed securities, rises and falls over time. As the table shows, you buy most ETF units in quarter 1 when the unit price is $5. You buy the least in quarter 3 when the price is $10.
After five quarters, you own 144 ETF units and you’ve paid $1000 all up, giving you an average price per unit of $6.94. By the end of quarter 5, the ETFs are trading at $8.50, giving you a portfolio worth $1224, so you’ve already gained $224.
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