Many people feel they need to have a lot of money in order to start investing. In fact, the opposite is true. Investing small amounts every month actually provides the best risk-return scenario when it comes to longer-term investing.
Investing via a monthly debit order has two major advantages. Firstly, it forces you to save, because the money goes off your account before you get the chance to spend it on consumables. Secondly, investing smaller amounts more regularly allows you to take advantage of what we call rand cost averaging.
Studies show that rand cost averaging provides better returns than investing a larger lump sum at less regular intervals.
When you invest a steady amount monthly, you get to buy more units or shares when prices are low and fewer when prices are high. This means on average you purchase more shares or units at a lower price, reducing the overall price you paid for the total number of shares or units. This is what we mean by rand cost averaging.
Rand cost averaging example
Let’s see how this would work in practice.
In this example you invest R200 per month. In January the value of the fund is R10 per unit/share which means your R200 buys you 20 units. In February the market falls 15% and the price per unit drops to R8.50, so your R200 buys you 23.53 units. In March the market falls another 10% and now your R200 buys you 26.14 units. This is like going to buy clothes on a sale – you get more for the same amount of money!
By April the market starts to recover and rises by 10%. The unit price increases to R8.42 and your R200 buys you 23.77 units. In May the market rises another 10% and you are able to only buy 21.61 units.
Keep in mind that at this stage the unit price is still 7.5% down from January at R9.26. However, this does not necessarily mean you have lost money.
You invested R1000 over five months and now have 115.05 units at R9.26 per unit which equals R1065. In comparison, if you had invested a lump sum of R1000 in January, you would have bought 100 units, and the value of your investment after the same five months would only be R926.
There are many low-cost platforms that allow for low-value regular investments, giving you exposure to the Johannesburg Stock Exchange (JSE) and even global markets.
For example, Satrix has no minimums which means you could invest as little as R50 a month. EtfSA accepts debit orders of R300 a month or lump sums of R300. Both platforms offer investments that track the performance of our local stock market as well as global markets.
This means you can get exposure to major South African companies like Anglo American, MTN and PicknPay as well as global companies like Apple or Microsoft through your investment.
Remember, however, that even if you are investing regularly via a debit order, if your investment is in the JSE (whether that’s via unit trusts or exchange-traded funds), you still need to have at least a five-year time horizon before you will need to withdraw the money. This is because in the shorter term, markets can fall and you need time for them to recover – as we saw with the pandemic crash in March 2020.
This article first appeared in City Press.