‘Rand cost averaging’
is one of the most popular ways to invest
regularly, explains Phil Oakley in MoneyWeek
This is where you invest
a constant amount of money each month, or every few months.
The logic of the approach is that markets go up and down a lot, for a wide range of reasons.
Because of this it is virtually impossible for investors to time their purchases so that they always buy when prices are low.
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If you put your savings on autopilot, you sometimes buy things when they are cheap, and at other times when they are expensive.
Over time you hope to smooth out the average cost of investing and boost your long-term performance.
This method has a lot to commend it.
It’s almost a ‘buy and forget’ strategy and it does a good job of taking the emotions out of investing. That’s so important, as often it’s our emotions that drive our worst investment mistakes.
However, as with most things in life, rand cost averaging is not perfect.
That’s because there are no rules for when to sell an investment.
Rebalancing allows you to get rid of the duds
For example, during the late 1990s, you could easily have continued to buy into overpriced stock markets. But you would lose a lot when they crashed a few years later.
The best strategies are the ones that can help you buy when prices are low and sell when they get too high.
One such strategy is ‘rebalancing’
You set out target allocations for different investments in your portfolio. For example, 40% in shares, 50% in bonds and 10% in gold
Then once a year or so, you sell some of what has done well and buy some of what has done poorly. This keeps your portfolio within its target allocations.
So if at the end of the year, shares take up 50% of your portfolio and bonds 40%, you’d sell some shares and buy some bonds. That’s if you are still happy with your allocation.
Rebalancing has a decent track record. It improves long-term returns and reduces risks – something every investor should aim to do.
So there you have it, how to save and put money away regularly for your future.