Noel Whittaker's Blog It is now 10 years since the GFC hit, and predictably the media is pondering when the next crisis will strike. It’s a fact of life that nobody can accurately forecast what markets will do, but that should not stop you investing.
If you have money to invest, but are nervous, you could adopt a strategy called “dollar cost averaging”, which consists of investing a set sum every month into the same investment.
For it to work, your investment has to move back up when the market does, so don’t use it to buy speculative mining shares. Quality share trusts are the perfect investment for dollar cost averaging because your money is spread over a range of companies and the price of their units tends to fluctuate in line with the stock market.
Let’s see how it works in practice. We’ll assume you started investing $1000 a month in August 2008 just before the mother of all crashes – and kept it up faithfully despite all the ups and downs of the market. Provided you reinvested all your dividends, and the performance of your investment matched the All Ordinaries Accumulation Index, you would now have $195,000 for a total investment of $119,000. That’s a return of 10.3%p.a. compound.
The good news doesn’t stop there. Because of the imputation system, all or most of the dividends may have been tax free and no capital gains tax would be payable until you sell.
Do some modelling for yourself. Go to noelwhittaker.com.au and click on Stock Market Calculators, Dollar Cost Averaging. This will enable you to choose a starting and finishing date, and invest a hypothetical monthly amount. All you have to do is press Calculate and the program will tell you how much your investment would be worth if you had made that investment with real money.
Remember, rising life expectancies mean the average Australian will live to 85 or longer – this means even a 60 year old could have a 25 year horizon when deciding upon their asset allocation. Anybody who stays away from shares is missing out on the investment with the greatest potential of all.