By G.R. Krahmer
Dollar Cost Averaging or Periodic Investing is an emotionless strategy, where you invest a fixed
amount at a fixed time, such as every month, regardless of the price at that time. It is not always
easy to invest, especially when the investment is declining. Concerns may arise such as: “What
happens if the market continues to fall after I invest? Or was this the right time?”
- The market moves in cycles
In general, the market moves in cycles. No one can predict the future, and things can happen,
especially in the short term. Results achieved in the past provide no guarantee for the
future. If you invest a fixed amount periodically, this means that you buy more shares when the
price is low, and fewer when the price is high.
One way to invest is to invest €1,000 once and then buy an additional €100 every month and do
nothing else. This is called invest periodically or in English: “dollar cost averaging”.
The months before the market crash
In december 2007, the market was at its peak around that time. A few months before, the 2008
housing crisis would begin. It probably won’t be a good time to get in, right before the abyss. Or
would it?… If you had started this in December 2007, you would have achieved an average
return of almost 7% per year, while the price has remained the same on balance. While in the
period from December 2007 to December 2013 you initially only see red numbers…
…with a total investment of €8,200, you ultimately had an amount of €13,207.
€5,000, more than 60% profit on your total investment!
This shows that entering during, or just before, a crisis can be very profitable. So there is little
point in waiting. By investing periodically, you can start with a small amount and build up a nice
capital. You can therefore achieve a nice average return over the long term, provided you do so
through a broad spread and a long-term approach.
- Periodic investing; as early as possible.
Quitting work earlier, supplementing your pension, paying off a mortgage, creating a savings pot
for the children or simply putting money away for later. Whatever your goal, monthly investing is
the ideal way to build wealth. Even if you don’t have a goal, but you do have money left over
every month, it is smart to invest it instead of leaving it in your bank account.
What exactly is periodic investing? It involves investing a fixed amount at regular intervals. For
example, every quarter or every month. Because you invest periodically, your capital grows
without you having to look at it much. You instruct the bank to transfer a fixed amount every
month, which is then deposited into the selected funds, and then you don’t have to do anything
anymore. From now on, the monthly deposits will be automatically transferred and invested.
This way your wealth grows unnoticed. You always have access to your money, and you can do
whatever you want with it. You are not committed to anything and are not obliged to use the
accrued amount for your pension or mortgage. Of course, it is possible, but it does not HAVE
to be done and that is important.
With monthly investing, you can build up a significant amount of capital with a relatively small
amount per month. There are two reasons for this, namely a nice average purchase price and
the interest-on-interest effect.
EXAMPLE 1
If you invest a fixed amount periodically, this means that you buy more shares when the price is
low, and fewer when the price is high.
If you invest an amount of €300 every month at a price of €100, you buy 3 shares. If the price
has fallen to €50 a month later, you buy 6 shares with the €300 you invest. In this example you
see that after 5 months you have invested a total of €1,500 and you own 17 shares. On
average, you paid about €88.25 per share. The exchange rate is €100, so that means that you
have almost a 12% profit, while the price is at the same level as at the beginning. You have 17
shares of €100, which is €1,700, while you have only invested €1,500 in total. €200 so profit.
This way, price fluctuations can work to your advantage, and you can start with a smaller
amount. Unfortunately, it does not mean that you always make a profit, because when prices fall
you make a loss. Fortunately, the loss is less great.
Month Inlay Course Number of shares
1 €300 €100 3
2 €300 €50 6
3 €300 €100 3
4 €300 €150 2
5 €300 €100 3
Total €1,500 17
EXAMPLE 2
If you invest a fixed amount each month for a longer period, you can build up a significant
amount of capital with a relatively small investment. This is coming through the
interest-on-interest effect. If you invest for the long term, you will not only achieve a return on
your investment, but also on the returns previously achieved. In the first years this effect will not
be so powerful, but over time it will increase. You create a snowball effect, which will cause your
investments to grow faster and faster.
Below, you will see some examples of what monthly investing can yield. A gross return (before
costs) of 8% per year has been assumed.
Deposit per
month After 10 years After 20 years After 30 years
€100 €17.202 €52.657 €125.730
€300 €52.343 €160.223 €382.568
€500 €87.483 €267.790 €639.406
€1000 €175.335 €536.705 €1.281.501
Start as early as possible
It is smart to start investing as early as possible so that the interest-on-interest effect can do
its job and the greater your assets will ultimately be. You can see this in the following calculation
example. If you were to invest 100 euros every month from the age of 30 to the age of 40 and
then deposit no more, you would (with an average return of 8% per year) have built up a
capital of €124.000. If you only started investing 100 euros per month at the age of 40 and
continued to invest 100 euros per month until the age of 65, you would end up with an amount
of only 91,000 euros. This is the reason not to postpone it and to start as soon as possible.
- Returns
Return is the loss or gain on an invested amount of money over a specified period of time. This
is usually expressed as a percentage.
But what are the expected returns for, for example, the stock market? Of course, it depends on
which stocks or funds you look at exactly, but the return of the global stock market has achieved
an average return of around 8 to 11 percent. These are historical returns and are therefore no
guarantee that they will also achieve these returns in the future
Everyone knows the TV commercials and advertisements that end with “Results achieved in
the past provide no guarantee for the future” But… if past returns have no predictive value,
what should you base it on?
In fact, the returns from the past 5 or 10 years, for example, say nothing about the returns that
will come in the coming years. Yesterday’s winners could be tomorrow’s losers. However, past
returns can provide a reasonably reliable indication of the returns you can expect, but very long
time periods must be used for this.
Conclusion:
But yes… How far do you have to look back to be able to say something meaningful about
expected returns? Most people/investors think that 10 years is a long term, but even these
returns can be very variable.
Anything can happen in the short term, but returns over the long term are quite stable. In the
1990s you would have earned about 13% per year on global equities, while if you look from
2000 to 2009 you had an average return of -7% per year. If you had taken the period from the
1990s to the present, you would have achieved an average annual return of more than 8%. It is
therefore best to base your expected returns on as many decades as possible. The average
return just mentioned includes all stock market crashes and falling markets.
It is important to know that the market works in cycles, there are ups and downs. Once you
understand that the stock market has ALWAYS recovered so far, you can use this knowledge
to your advantage.
