What is “Systematic Investing” and what are the advantages of this approach compared to investing a lump sum?
Systematic investing is the principle of investing a fixed amount of money at regular intervals (e.g. monthly) over a long period of time. Or if you have a lump sum to invest, it is choosing to phase into the markets over several months.
Systematic investing is especially useful when it comes to investing in equities. While it is very important to have a diversified portfolio, equities are a key ingredient to ensuring a long term hedge against inflation. Provided that you do not have to withdraw from your investment in the short term, you would do well to keep a large portion of your investment portfolio in good quality equity investments.
The key advantage of systematic investing is the principle of Rand Cost Averaging. As shares (equities) are volatile in nature and their prices change on a daily basis, there is an investment risk associated with investing in equities. This risk can be greatly reduced by accumulating wealth over time through a regular fixed monthly investment. So while the amount of money invested monthly remains the same over time, the number of units purchased varies based on the market value of the underlying shares. When the stock markets are up, you buy fewer shares per Rand invested due to the higher cost per share. And when the markets are down, the situation is reversed and you purchase a greater of number of shares per Rand invested.
Another advantage is being able to accumulate wealth even if you can only afford to save a little each month – most of us are used to paying for monthly expenses from our income, and it is a great idea to get into the habit of monthly investing. Before long you would have established a healthy investment portfolio!
You also do not need to worry about trying to “time the market” – the sooner you start the better! And once you start investing on a regular monthly basis, and continue investing during market highs and lows, you will greatly reduce the market risk associated with equity investing.
