The decline in investment markets has caused many people to lose confidence in managed funds and shares. This is perfectly understandable, however there are some strategies which can help soften the blow during times of volatility - one of these is establishing or maintaining a regular investment plan.
A smoother ride
A regular investment plan is a strategy where you add money to your investment at regular intervals and is a disciplined way to meet your long term goals. At the same time you are minimising the risk of investing a large sum just before a market decline. In fact, investing a regular amount each month actually gives you the opportunity to benefit from market fluctuations rather than be a victim of them. This opportunity is often referred to as 'dollar cost averaging', and relates to the fact that if prices fall you will be receiving more units (or shares) for your money than you were before. If markets recover you have more units than you would have done had prices remained the same.
Make your money work harder
Regular investing can significantly enhance the worth of your investment over time by taking advantage of the power of compounding. Put simply, each dollar you invest has the potential to earn a return; if you reinvest that return it earns more dollars. This gives your investment the potential to grow much faster, turning your savings into earnings.
For example if you invested $10,000 in the Colonial First State Imputation Fund on 30/09/98 it would now be worth $24,269. If you regularly topped this up with just $200 a month your investment would be worth over $56,194 now.*
Regular investing can be a good habit to get into. No one can predict when the market will go up or down and investing at regular intervals not only takes the guess work out of trying to time when to invest, but can also help you achieve smoother returns over time. Those who have the willpower to stay invested through the inevitable downturns are usually rewarded in time.
To find out more talk to your financial adviser or visit colonialfirststate.com.au
* Past performance is no indication of future performance. Assumes $10,000 invested on 30/09/98 per month until 30/09/08, with distributions reinvested, 4.00% entry fee and 0.20% spread applied. Performance quoted after management fees. Issued by, and Product Disclosure Statement (PDS) available from, Colonial First State Investments Limited ABN 98 002 348 352 AFSL 232468. Remember this is general advice only and does not take into account any of your personal circumstances or financial situation, so you should think about whether it applies to you and consider talking to an adviser. Current at September 2008.