21 September 2021

Drip feed your investments

Investing a certain amount at regular intervals (for example automatically every pay day) saves you having to try to pick when it’s a good time to buy.

This is how KiwiSaver works and you can do the same with other managed funds or on online investing platforms.

There are three advantages to drip feeding investments:

  • You benefit from what is called dollar cost averaging – which means putting the same amount of money regularly into a fund – regardless of whether prices are high or low. If markets are down, you get more for your money. This helps balance out those times when prices are high.
  • You don’t have to think about when to invest.
  • You create a habit. 

More about dollar cost averaging (as explained by Mary Holm):

Let’s say you’re contributing $100 a month into a KiwiSaver or another managed fund.

When you deposit money, the manager uses it to buy units in the fund for you. If the investment markets have been performing well lately, these units might be worth $20. Your $100 will buy five units. But later the markets fall, and the units are worth just $10.

That means your $100 will buy ten units. You buy more units when they are cheap and fewer when they are expensive. This reduces your average price.

If you’ve got a lump sum, it’s still better to invest it in smaller lots, rather than all at once. If you get the timing wrong and move it all into a fund or a particular share, just before a market downturn, you could be really annoyed.

To avoid the chance of that, it’s good to drip-feed the money into your investment in in three or four lots, perhaps a month apart.