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Rand cost averaging - A steady investment strategy for any market

by , 09 May 2016

When it comes to investing, it pays to realise you're in a long-term game. And because of this, you don't want to be stressing about the markets daily moves. That's why I use a simple technique called rand cost averaging.

To use this technique, all you need to do is invest a set amount of your capital each month. No matter what the markets are doing, you steadily invest the same amount.

Rand cost averaging has several great benefits for you as an investor…
 
First of all, because you invest every month, you don’t risk being left on the side lines while the market runs. You’re adding to your investment every month.
 
Secondly, if the markets fall, you haven’t invested all your capital in one lump sum that will take a large knock.
 
And thirdly, by buying every month, you’re able to secure below average market prices.
 
That’s because you buy less shares when prices are high and more when prices are low.
 
This last point is really the key benefit to rand cost averaging. And I’ll explain it using an example…
 
Let’s say you decide to buy R6,000 of shares each month. The first month, you paid R100 per share and received 60 shares for your R6,000. In the second month, the share price has fallen and you pay R80 per share and received 75 shares for your R6,000.
 
And finally, in the third month, the share price has rallied and you buy shares for R125 each.
 
And you get 48 shares for your R6,000.
 
Now if you add this all up you’ll see you beat the markets average share price. You bought 183 shares at an average price of R98.36. (R6,000 x 3 ÷ 183)
 
That’s 3.25% lower than the average share price for the three months of R101.67. (R100 + R80 + R125 ÷ 3) And that’s just in three months. The longer you do it, the larger the savings become.
 
So use rand cost averaging to start investing in the markets today without having to worry about what the market’s doing.
 
 
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