28/04/2015

The latest medium and long-term returns of the big balanced super funds provide a telling reminder about a powerful and straightforward investment strategy known as dollar cost averaging.

Dollar cost averaging simply involves investing the same amount of money over regular time periods – regardless of whether asset prices are up or down.

Many super fund members making regular compulsory and salary-sacrificed (or personally-deductible contributions if eligible) may not realise that they are practising a form of dollar cost averaging.

Dollar cost averaging means that investors with exposure to the sharemarket, for instance, buy more shares or units when prices are lower and fewer when prices are higher. Significantly, the strategy can reduce any temptation to follow the investment herd by trying to pick the best times to buy or sell.

Super fund researcher SuperRatings reports that the median large super fund with a balanced portfolio in the accumulation phase returned 13.1 per cent return over the 12 months to March 31. And the median fund returned an annualised 11.9 per cent over three years, 8.7 per cent over five years, 6 per cent over seven years (which, of course, captures the impact of the GFC) and 6.8 per cent over 10 years.

From the perspective of individual super fund members, these returns illustrate the benefits of regular contributions in different market conditions, a diversified portfolio, compounding returns and a disciplined, long-term focus.

The less-positive news about dollar cost averaging is that sometimes investors will buy into a market at higher prices; the good news, as discussed, is that investors will also buy at low points.

Nevertheless, the core benefit of dollar cost averaging is not so much the price paid for investments; it is the adherence to a disciplined, non-emotive approach to investing.