The many pros of investing via debit order

2012-04-28 09:38

A monthly debit order is undoubtedly one of the most powerful investment tools.

It creates a savings discipline as it goes off your account before you have spent your money on consumables. But now studies show that rand cost averaging, which is what you do with a debit order, provides better returns than investing a lump sum, especially over volatile investment periods.

The concept of rand cost averaging is relatively simple. Dr Prieur du Plessis, Plexus group chairman, explains that by investing a fixed amount on a regular basis, one buys more units or shares when prices are low and fewer when prices are high.

This means you purchase more shares or units at a lower price, which reduces the overall price you pay for the total number of shares or units in your account.

Du Plessis says the biggest advantage of this strategy is that it eliminates the risk of poor investment timing by investing a lump sum when the market is at or close to a peak.
 
A study conducted by Plexus Asset Management during the financial crisis between 2008 and 2009 shows that only 23 of the 108 domestic equity unit trusts achieved positive returns over the year to July 31 2009, with some of them showing losses in excess of 9.4%.

But the results are quite different for investors who had opted for a rand cost averaging strategy.

 Had a lump sum been phased in over 12 months from July 31 2008, not one of the 108 equity funds would have lost investors’ money.

Five reasons to invest by debit order

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 become a significant amount of money over time – for example, a monthly debit order of just R200 (less than the cost of a meal out with the family) paid over 10 years will be worth as much as R40 000 if the investment grows at 10% a year because of 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 because 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. This kind of “phased-in” investing is known as rand cost averaging, as it helps to average out the return on your investment.

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 pay for the total number of units in your account.

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