Johann Rossouw | 11 April 2023
Johann Rossouw is an Associate Financial Planner at Fiscal Private Client Services. He holds the Certified Financial Planner® accreditation and has a keen interest in personal finance and how financial markets affect our everyday lives.
“Is now a good time to invest?” is probably the question financial planning professionals are most asked. The truth is, we simply do not know as none of us graduated with a crystal ball.
As the father of value investing, Benjamin Graham, once said: "In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility."
If you can’t time the market, what can you do?
So if market timing is a fool’s errand, how can you, as an ordinary investor, build long-term wealth without falling victim to extreme market volatility and black swan events?
A possible answer, as it turns out, is an extremely simple yet effective solution called rand-cost averaging.
Investing a lump sum of money at once can be risky, as you are essentially making a big bet on the market's performance at a point in time. Rand-cost averaging, however, is a strategy where investors make fixed investments at regular intervals over a period of time.
The idea is that by investing a fixed amount on a regular basis, investors can take advantage of market volatility and buy more units when prices are low and fewer when prices are high. Read more: Should I invest a lump sum or regular amounts in a unit trust fund?
Consider this example
Assume Sam and Sam’s bestie both wanted to invest R1 000 000 in the same fund on 1 March 2022. Sam wanted to invest her R1 000 000 as a once-off lump sum, as she believed that it was the perfect time to jump into the market, while Sam’s bestie was rather apprehensive and wanted to invest in 10 equal payments of R100 000 each.
The table below indicates the price per unit for the fund they chose to invest in, and the amount of units Sam and her bestie bought at that specific moment in time. On March 1 2022, Sam bought 139.84 units with her R1 000 000, while Sam’s bestie bought 13.98 units with her R100 000.
THE BENEFITS OF INVESTING OVER TIME
| Unit price | Sam invested | Units Sam purchased | Sam's bestie invested | Units Sam's bestie invested | |
| 01-Mar-22 | R7 150,88 | R1 000 000 | 139,84 | R100 000 | 13,98 |
| 01-Apr-22 | R6 988,33 | R100 000 | 14,31 | ||
| 01-May-22 | R6 494,05 | R100 000 | 15,40 | ||
| 01-Jun-22 | R6 512,09 | R100 000 | 15,36 | ||
| 01-Jul-22 | R6 027,26 | R100 000 | 16,59 | ||
| 01-Aug-22 | R6 225,18 | R100 000 | 16,06 | ||
| 01-Sep-22 | R6 001,94 | R100 000 | 16,66 | ||
| 01-Oct-22 | R6 040,94 | R100 000 | 16,55 | ||
| 01-Nov-22 | R6 098,02 | R100 000 | 16,40 | ||
| 01-Dec-22 | R6 907,50 | R100 000 | 14,48 | ||
| Total invested | R1 000 000 | R1 000 000 | |||
| Total units held | 139,84 | 155,79 | |||
| Market value | R965 965,03 | R1 076 150, 40 |
On 1 December 2022, Sam had 139.84 units (at a total value of R965 965.03), while Sam’s bestie had 155.79 units (valued at R1 076 150). By phasing her investment into the market, Sam’s bestie gained R110 185 more than Sam.
This example shows well how rand-cost averaging can benefit you when markets are moving down – the value of Sam’s investment fell from the date she purchased while Sam’s bestie, despite investing later, benefitted from the lower prices.
A smart strategy to grow wealth
In conclusion, rand-cost averaging is a smart investment strategy that can help everyday investors build their wealth over time, especially for those who don’t have a big lump sum.
By investing a fixed amount at regular intervals, investors can avoid the pitfalls of trying to time the market, take advantage of market volatility, and benefit from the power of compounding. If you're looking for a simple and effective investment strategy, rand-cost averaging is definitely worth considering. Read more: Why compounding growth is so important.
Of course, like any investment strategy, there are risks involved with rand-cost averaging. Market fluctuations, economic uncertainty, and other factors can impact the performance of your investments. Read more: What do I need to know about investment risk?
However, by investing for the long-term and sticking to your investment plan, you can help to mitigate these risks and build a strong investment portfolio over time. As always, consider talking to a qualified financial planner, ideally a certified financial planner, who will be able to assist you with any investment related queries you might have.
