Dollar cost averaging and compound interest
What is dollar cost averaging?
Dollar cost averaging means you invest a set amount of money on a regular basis over a long period of time. The advantage is that you buy less when the market is up and more when the market is down.
Dollar cost averaging doesn’t guarantee a profit but it can help smooth out the market’s ups and downs, as this case study shows.
Initial investment
You put $100 per month into a managed fund that had an initial unit price of $10.
Market fluctuations
Over the next few months the market falls causing the unit price to drop, before recovering to its original value.
After 5 months
You have 65 units, each worth $10, a total of $650.
Profit
You have invested $500, so your profit is $150 even though the unit price is the same as when you first invested.
| Month | Investment | Unit price | Units purchased |
| 1 | $100 | $10 | 10 |
| 2 | $100 | $8 | 12.5 |
| 3 | $100 | $5 | 20 |
| 4 | $100 | $8 | 12.5 |
| 5 | $100 | $10 | 10 |
| Total | $500 | - | 65 |
This table is for educational purposes only. It is not representative of any particular investment product or investment strategy. No allowance has been made for inflation, fees or expenses.
How to make your investments grow faster using compound interest
Compound interest is simply reinvesting the interest you've earned so that you earn interest on your interest. This chart shows how a small investment can grow over time.
Investment
Initial investment of $1,000, then a monthly investment of $200 per month for 10 years, based on an investment return of 8% pa and inflation of 2.5% pa.
After 10 years
Total contributions will be $27,888 and the investment will be worth $42,825 and the total portfolio equates to $70,713.
<insert compound graph image>
Assumptions: Tax and fees are not taken into consideration, investment returns consist of income and growth and are calculated monthly. This illustration is not representative of any investment product.
For more practical examples of how compound interest can make your savings snowball, read up on The power of compounding over time.
Use #[internal The power of reinvestment visual demonstrator] to see how reinvesting your interest can help a small investment grow over time.
Use #[internal The cost of delay visual demonstrator] to see the advantages of investing early.
