As markets fall, continuing with you regular monthly investment is the most powerful tool to ensure positive long-term growth.

The stock markets have had a really grim start to the year. At the beginning of this week the JSE All-Share Index had fallen 22% since the start of the year, and the US markets have performed about the same. This has been mostly driven by fears around the coronavirus.

We always talk about “buy low and sell high” but our emotions get in the way and it is very difficult to invest a lump sum when there is bad news everywhere. But ihaving a regular monthly investment forces you to do exactly the right thing: you buy more shares at a lower price resulting in a better long-term performance.

A study conducted by Plexus Asset Management during the financial crisis of 2008-09 showed that only 23 of the 108 domestic equity unit trusts achieved positive returns over the year ended 31 July 2009, with some of them showing losses in excess of 9.4%.

However, the results are quite different for investors who had opted for a phased-in approach. Had a lump sum been phased in over 12 months from 31 July 2008, not one of the 108 equity funds would have lost the investor money.

By investing monthly, you achieve what’s called rand-cost averaging. What this means is that by investing a fixed rand amount on a regular basis, you buy more units or shares when prices are low and fewer when prices are high.

This means you are purchasing more shares or units at a lower price which reduces the overall price you paid for the total number of shares or units in your account. With a debit order, you don’t need to worry about market timing or whether the market is over-valued because if the market falls you get more bang your buck by purchasing more shares with the same amount of money.

How rand-cost averaging works

In this example, by the end of May you have invested R1 000, the market has fallen by 25% and although it recovered somewhat, it is not back to the levels when you started investing. Yet you accumulated 115.05 units. At the current (end of May) price of R9.26 per unit, that comes to R1 065. This is the benefit of rand-cost averaging – making money in a falling market! If you’d invested the full R1 000 in January, and thus bought 100 units, your investment would only be worth R926 (100 units, each worth R9.26).

Five reasons to maintain a monthly investment

1. It forces you to save. A debit order goes off your bank account before you can spend the money, and you learn to live off the money that is left in your account.
2. Your savings grow over time. A relatively small debit order can over time become a significant amount of money. A monthly debit order of just R200 (less than the cost of meal out with the family) invested over ten years will be worth as much as R40 000 if the investment grows at 10% a year, due to the power of compounding growth.
3. It reduces the risk of emotional investing. With a lump-sum investment in units (shares), the timing of entering the market has a significant impact on the investment return. Our emotions increase the chance that we will invest at the wrong time: we tend to buy high and sell low as we get caught up in the emotions of investing.
4. It protects your investment from the risk of bad timing because you buy both when the market is up and when it is down.
5. It reduces the overall price of your units. You buy more units (shares) when prices are low, and fewer units when prices are high, which reduces the overall price you paid for the total number of units in your account.

This article first appeared in City Press.