Rand cost averaging: An investment strategy to help you slowly build up a share portfolio

Julie Brownlee, Fsp Invest, 12 Sep. 2014

Tags: rand cost averaging, investment strategy, what is rand cost averaging, how rand cost averaging works, benefits of rand cost averaging

If you want to invest in the stock market, you have two main options open to you. You can buy into unit trusts. Or you can buy specific shares.

Whichever option you pick, how do you go about it? Do you decide one day that you’re going to invest a lump sum, or is there another way that allows you to invest?

This alternative is rand cost averaging. So what is rand cost averaging? And what are the benefits of following a strategy like this?

Read on to find out what you need to know about rand cost averaging…

The benefits of rand cost averaging

Following rand cost averaging as an investment strategy has two main benefits:

Firstly, it commits you to regularly save money to invest.

And secondly, it helps you to avoid making the mistake of putting a lump sum into shares or a unit trust when they’re expensive. It also stops you panic selling your holdings when the shares or unit trusts’ value drops in price.

Rand cost averaging in action

Let’s say you decide to put R5,000 a quarter into the stock market. For the purpose of this example, let’s assume you’re buying shares.

Over the course of a year, the share prices over the four quarter ends are R20, R22, R14 and R18.

This means you buy the following number of shares:

  • First quarter: 250 (R5,000/R20);
  • Second quarter: 227 (R5,000/R22);
  • Third quarter: 357 (R5,000/R14); and
  • Fourth quarter: 277 (R5,000/R18).

So by the end of the year, that’s 1,111 shares worth R18 each. That’s R19,998 (1,111 x R18) in total.

If on the other hand, you’d invested R20,000 into the shares at the start, you’d own 1,000 shares worth R18,000 at the end (1,000 x R18).

This example shows that rand cost averaging has worked well in a volatile market.

Of course, it doesn’t always perform better than investing a lump sum into the market. If you get your timing right and buy when the share price is cheap, you should benefit over the long-term.

But for many investors, it’s psychologically easier to save regularly as you avoid the stress of trying to time the market. And it makes a practical investment strategy for many investors.

So there you have it, an investment strategy that helps you to slowly build up a share portfolio.

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