Dollar-cost averaging: a superannuation perk you might not be aware of

For many, investing can be stressful. If you buy too soon, you risk regret if the price drops, but if you wait and the price goes up, you may feel like you’ve missed out on a deal. Dollar-cost averaging is a powerful way to overcome the unpredictability of investment markets. 

Like a regular savings plan, dollar-cost averaging simply involves investing the same amount of money over a long period of time at predetermined intervals instead of investing money in one lump sum. As unit prices move up and down, investors automatically buy shares or units when prices are lower and fewer when prices are higher, which helps to avoid the pitfalls of attempting to time entry into markets. 

Why dollar-cost averaging works

By committing to investing a fixed amount into an investment that varies in price, such as shares or managed fund units, you can purchase more when the price is low and less when the price is high. 

By setting aside a certain amount of money each year towards investing, and assuming returns will fluctuate greatly over a 10-year period depending on market conditions, you could have a regular flow of funds inserted into investments at different market prices.  

Averaging does not mean investments will succeed, nor does it protect investors from falling asset prices. Instead, it’s a way to average the costs of investing and can be seen as a powerful risk-reduction strategy for those who would otherwise be reluctant to stick to a long-term investment plan in the face of volatility.

Benefits of regular contributions

For most investors, averaging provides a straightforward way to accumulate wealth steadily without being overly concerned about prevailing market volatility. 

Investing into your super via pre-tax concessional contributions is a practical investment method because of the potential tax benefits. Dollar-cost averaging is an example of how salary earners can invest into their super, via their employer’s routine compulsory super guarantee contributions. Salary sacrifice can also be another way to make additional regular contributions to take advantage of dollar-cost average strategy.

For individuals with the patience to consistently invest over the long run, even during unstable investment periods as we’ve experienced, averaging is a strategy worth exploring.

Things to consider 

Like any investment method, dollar-cost averaging is not a guarantee of success or a protection against loss in declining markets. It also requires ongoing investments in securities, so you should think about your ability to continue buying at times of low-price levels in terms of your financial situation. Additionally, if you have a lump sum of money that you want to invest in the market, such as an inheritance, a bonus, or another large figure, there might be better strategies to use. While a lump sum can be kept in cash and invested incrementally, it can alternatively be invested all at once, which entails more risk but may have the potential to yield higher returns (because any money you have sitting in cash will miss out on potential market returns). 

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