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Investment strategy uncovered: Is it worth bothering about rand cost averaging?

by , 16 September 2014

Rand cost averaging (or drip feeding) involves investing a fixed amount of money into the stock market on a monthly basis.

The idea behind rand cost averaging is it benefits those investors who don't have a lump sum to invest by slowly building their holdings.

An additional advantage is you invest regardless of what the stock market is doing. This means you benefit by buying more when prices are low. This should lower your average entry price when you compare it to when prices are high.

So does rand cost averaging actually work?

Let's take a closer look at a recent study of rand cost averaging…

How rand cost averaging performs

There have been a number of studies into the performance of rand cost averaging over the long-term.

One of these studies, published in 2012 by US fund manager Vanguard, looked at the performance of regular investing and lump-sum investment strategies across a number of markets.

The UK study it did (into pound cost averaging) looked at the difference in performance of investing £1 million in a lump sum versus drip feeding separate £1 million sums into the market in equal amounts over periods of six, 12, 18, 24, 30 and 36 months.

Once the money was in the market, each portfolio had the same asset allocation and stayed in the market for ten year. (Asset allocation means the way money was distributed across different asset classes.)

The study looked at the performance from 1976 to 2011, Phil Oakley in Money Week explains.

Lump sum investing performed marginally better than rand cost averaging

Vanguard’s study showed that around 66% of the time, a lump sum investment strategy did better than pound cost averaging. Lump sum investors netted 2.2% more.

The lump sum investment strategy also had less risk due to lower volatility. In comparison to the pound cost averaging portfolios, a lump sum investment didn’t bounce around as much.

With this in mind, rand cost averaging may be slightly higher risk and not yield just as good results, albeit marginally.

But the fact remains that many investors don’t have lump sums to invest. Rand cost averaging is the perfect way for them to invest into the stock market.

So there you have it, why it is worth bothering about rand cost averaging.

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Investment strategy uncovered: Is it worth bothering about rand cost averaging?
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