25 Aug Rand Cost Averaging in Declining Markets
When markets struggle, consumers can be tempted to switch their retirement funding plans to the haven of cash.
There are a number of risks associated with this strategy. Firstly, by exiting in a declining market you essentially lock in your losses. Secondly, even seasoned investment professionals seldom get the timing right when exiting or later re-entering the market.
What is rand cost averaging?
It involves investing a fixed amount at regular intervals into investments. As prices fluctuate it follows that one gets less investment units or shares in a rising market and more units in a declining market. This means that in a declining market, the actual unit or share price will be lower than the average ruling price when you bought initially, or before the decline.
A further advantage is that a rand cost averaging strategy eliminates the risk of flawed investment timing of trying to anticipate when to exit or return.
Long term investment.
Investing for retirement is a long term strategy and over the decades market surges will always follow declines and vice versa. A reputable investment advisor should be taking into account many factors such as how your portfolio is balanced and your ability to absorb or exploit risk. This assessment should be reviewed annually as your circumstances change and you move through your various life stages on the way to retirement.
Can a lump sum be ‘rand cost averaged’?
Again, this strategy should be discussed with a certified financial advisor but yes, the lump sum can be phased in over a period of time to avoid the risk of volatility.
To assist our members or their beneficiaries to invest funds accessed through retirement,
resignation, retrenchment or dismissal, Salt Employee Benefits offers a personal financial advisory service in conjunction with our partner Benefit Councillor which is fully compliant with regulations of the South African Pension Funds Act.
Salt Employee Benefits
This article represents the view of the author. The article does not purport to offer financial advice but explains the concept of rand cost averaging which readers can explore with certified financial advisors,recognising that each individual has different personal circumstances to consider when making an investment.