One of the biggest obstacles for investors is the nagging feeling of uncertainty.
When things are volatile they say “I’ll stay in cash until things become clearer.”
Alternatively, after a strong market rally, as in recent years, they’ll start to hear the media commentary that markets need a pullback.
Again, they’ll want some more certainty before doing anything, but that brings the question – when do we ever have complete certainty?
We don’t, so that’s why the best thing an investor can do is maintain discipline and continue adding to their investment through dollar cost averaging.
Last week I highlighted the performance of a diversified portfolio that began its life at the worst time in financial history since the great depression.
Worth $100,000 at the beginning of 2008, it fell to a low of $81,045 by February 2009 before recovering to be worth $128,680 by the end of January 2014.
The performance wasn’t stellar, but given the worst case scenario market entry point, it shows the value of staying the course.
But how much better could that return have been if the investor had implemented a dollar cost averaging plan to contribute to the principle every quarter?
Let’s say the investor again started with $100,000 and saved $100 a week to be added into the portfolio at a rate of $1,200 every quarter.
The low point for the portfolio would have been $86,840 in March 2009 and by then the investor would have added $4,800 in contributions.
By December 2010 the portfolio was back in the green again, worth $113,547, just ahead of the initial $100,000 and $13,200 in contributions.
By the end of January 2014 the portfolio was worth $165,601 and if the $27,600 in contributions were removed, you were left with $138,001.
This was $9,321 more than if the investor had just left the $100,000 principle without contributions.
And while the return on the $100,000 was 4.2% per annum, the return overall on the contributions was closer to 6% per annum.
Proving you don’t need certainty to achieve returns, just consistency and discipline.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances.
