Noel Whittaker
Noel Whittaker

Dollar cost averaging for stocks

Welcome to another New Year.  Unfortunately, even though our stock market produced overall returns of better than 40% in 2009, all it could do in 2010 was tread water.     

Anybody who watches the stock market knows that good years often follow bad so the obvious question is “is this a good time to invest?” Unfortunately, nobody knows when the perfect time to invest is, but you can still enter the market safely using a technique called “dollar cost averaging”. It consists of investing a set sum every month into the same investment, and forgetting about what the market is doing.  

Share trusts are a perfect investment to use, because the price of their units fluctuates in line with the stock market, and most funds will accept monthly investments from as little as $100. Think of it as akin to buying apples. If you spend $100 on apples, and they are 50 cents each, you get 200 apples for $100. A price drop to 40 cents an apple means that $100 buys 250 apples. Obviously you can’t go wrong as long as the price of the apples eventually recovers to more than your buying price. Based on history the share market has always recovered to exceed its previous high point.  

Let’s see how it works in practice. We’ll assume you started investing $1000 a month in January 2000 - and kept it up faithfully despite all the ups and downs of the market. Provided you reinvested all your dividends, and the performance of your investment matched the All Ordinaries Accumulation Index, you would now have $202,026 for a total investment of $131,000. That’s a return of almost 8% per annum compound.   

The good news doesn't stop there. Because of the imputation system, all or most of the dividends may have been tax free and there no capital gains tax is payable until you sell – hopefully that will not be until after you retire. 

Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is noel.whittaker@whittakermacnaught.com.au.


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