Dollar-cost averaging to navigate market volatility

Dollar-cost averaging to navigate market volatility

The events of 2022 to date, have undoubtedly brought the return of elevated levels of uncertainty and volatility to the world’s markets. The Chicago Board Options Exchange’s Volatility Index (commonly referred to as the VIX Index), a common gauge of broad market sentiment that measures expectations of near-term price movements of the S&P 500 Index, is currently sitting above 35 points, its highest mark since October 2020.

It is periods of uncertainty like this when investors may like to be reminded of the merits of dollar cost averaging. Dollar cost averaging is the investing strategy of dividing up the total amount to be invested and periodically purchasing, in an effort to reduce the impact of volatility and emotion on an investment. This is an investment strategy all Australian employees will be familiar with as it reflects the periodic contributions employers make into their superannuation.

A 2012 Vanguard study compared the historical performance of a dollar cost averaging approach against standard lump-sum investing over a rolling 10-year rolling period across three markets: the United States (analysis going back to 1926), United Kingdom (1976) and Australia (1984). In their analysis, Vanguard compared the returns of $1,000,000 invested immediately as a lump sum and held for 10 years, with multiple dollar cost averaging approaches which saw the initial $1,000,000 divided into equal increments and invested across periods varying from 6, 12, 18, 24, 30 and 36 months, and then held until the end of the 10 years.

Across all three markets they found almost identical results, that the lump-sum approach outperformed the dollar cost averaging strategy two-thirds of the time. Notably, in periods when the dollar cost averaging approach was lengthened with instalments spread across 36 months, the lump-sum investing approach outperformed in approximately 90 per cent of all 10-year spans. Conceptually this is easy to understand, as the spaced out dollar cost averaging approach results in investor’s holding higher allocations to cash within their portfolio as they wait to deploy their capital, something typically undesirable given the upward trend of markets over the long-term (between 1989 through to February-end 2022, the S&P/ASX 300 Accumulation Index has averaged a compound annual return of 8.91 per cent).

However, if we focus our attention on shorter time periods characterised with elevated market volatility and considerable drawdowns, we get an entirely different story. 2020 was the last time investors experienced such market conditions.

Using The Montgomery Fund as our test case, as shown in the table below, investors who incrementally invested a fixed $10,000 on the final business day of each month generated a superior return of 7.30 per cent across the calendar year after adjusting for transaction costs, then the lump sum investor who invested their $120,000 on the 31 December 2019 (DCA: 7.93 per cent return vs. LSI: 0.59 per cent return). This difference is stark given the two investors invested the same total capital in the same investment vehicle over the same time period.

While admittingly a small sample of a single investment over a single calendar year, the data reveals the benefit of incremental investments to combat market volatility. As investors will know, the lower the price you pay, the higher one’s return.

Investors in any Montgomery or Polen Capital fund can make an additional investment to their holdings from as little as $1,000 as a one time payment at any time interval (or $500 a month for those who sign up to a Regular Savings Plan). Given investors in our offerings are charged a percentage-based buy-sell spread on any investment (initial or fixed), rather than a fixed-dollar brokerage fee, there is no difference in the fees incurred between either approach.

Below is a summary of the various methods in which an investor can make additional contributions to their Montgomery-related investments. Noting the first two methods are form-free.

BPAY:

Each Fund detailed below possesses its own unique Biller Code, with each underlying investment entity (i.e. your SMSF or Family Trust) containing its own unique Customer Reference Number (note this not your Fundhost Investor Number nor Access ID). Your entity’s Customer Reference Number was provided to you in your initial Welcome Letter from Fundhost. Please phone Fundhost on 02 8223 5400 if you are unable to locate this number.

• The Montgomery Fund
• Montgomery Small Companies Fund
• Polen Capital Global Growth Fund
• Polen Capital Global Small & Mid Cap Fund

EFT:

Similarly, each Fund possesses its own separate bank account. Investors must remember to utilise their Fundhost investor number and entity name (e.g. the ABC Super Fund) as their payment reference to ensure there are no administrative delays in correctly allocating your proceeds.

• Montgomery Private Fund
• The Montgomery Fund
• Montgomery Small Companies Fund
• Polen Capital Global Growth Fund
• Polen Capital Global Small & Mid Cap Fund

Regular Savings Plan:

Starting from $500 per month, investors can nominate Fundhost to direct debit proceeds from their bank account on the 15^th of each month. Unlike the above two methods, any variation or cancellation of the regular savings plan will require a signed form.

• The Montgomery Fund
• Montgomery Small Companies Fund
• Polen Capital Global Growth Fund
• Polen Capital Global Small & Mid Cap Fund

Olivia123:

Investors can also utilise the online application portal, Olivia 123, to instruct additional investments, however ultimately the payments methods required (BPAY, EFT, Direct Debit) will be the same as outlined above.

• The Montgomery Fund
• Montgomery Small Companies Fund
• Polen Capital Global Growth Fund
• Polen Capital Global Small and Mid Cap Fund 

If you have any questions on investing with Montgomery, please don’t hesitate to contact me, Toby Roberts, on 02 8046 5000 or at troberts@montinvest.com

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Toby Roberts is account manager for private clients. Toby joined Montgomery Investment Management in October 2019. Prior to this, Toby worked as a Distribution Partner at Colonial First State for two and a half years. Toby holds a Bachelor of Commerce (Finance) from the Australian National University.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.