The key to successful investing is to invest a little, a lot. There are a number of benefits to committing to the investment of a small amount of money on a regular basis; not the least of these is the fact that by committing to saving part of your surplus cash flow (each month, for example), there is a much greater chance you will be able to avoid the temptation of that new dress, pair of shoes, or that additional trip to the races this spring carnival!
One of the biggest benefits is the smoothing effect that investing regularly, as opposed to in a lump-sum, has on the average purchase or ‘unit price’ you pay. See this example from Perpetual.
As you can see, Jim is able to take advantage of the fluctuating market price of the XYZ Shares. Had Jim invested his $2,000 in a one off lump-sum, he would have purchased just 200 shares ($2,000 / $10).
This lesson also applies to contributions made to your superannuation. We often see, particularly with self-employed people, that when the share market is down, and demand for their services is also low, self-employed superannuation contributions are first to go in the squeeze for cash flow. If you’re only contributing when the economy is booming, you’re likely selling yourself short by only buying when the market is high.
Another benefit of investing small amounts regularly is that a regular commitment (which is automatically set up to occur on the same day, each month, for example) removes the ‘emotion’ and inclination to try and ‘time markets’ that are part of human nature. You may remember from our recent blog on investing in uncertain times that it’s time in the market, not ‘timing’ the market, that gives you the best returns. Having a plan that you have committed to with your Financial Adviser will assist in ensuring you’re saving your surplus cash flow.
Finally, the benefits from starting to invest early are startling. Take this example of someone who commences investing at age 30, and invests $200 per week for 10 years ($104,000 total) vs someone who commences at 40 and invests the same amount over 25 years ($260,000 total). Assuming a total return of 9% per annum, the person in option 1 has a significantly larger amount of capital available at age 65 ($1,595,049 vs $952,779), despite just 40% of the initial outlay.
*Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.
By Steven Nickelson, Certified Financial Planner
