Dollar Cost Averaging - The Easiest Way to Build Wealth Over Time

Jason · 00:00Welcome to episode 232 of the Numbers Game. I'm Jace. I'm here with Nick and Marty. And mate, you, Nick, you always find a way to get Donald Trump mentioned. So I'm gonna throw to you what have you got for us today?

Nick · 00:12I'm gonna mention Donald Trump, but I'm just gonna talk about the best way to make money in the stock market and it's to do absolutely nothing

Jason · 00:19Great.

Nick · 00:20Almost awesome.

Jason · 00:21Great app. Thanks for listening. Sense almost, I think almost was

Marty · 00:24a pivotal word there. Almost,

Nick · 00:26almost. So

Jason · 00:27almost. Tell us more.

Nick · 00:28Well, let's, um, well let's talk about Donald Trump. Um, and, you know, I think. That since he's been in, uh, office, um, and well, he hasn't been in office long and the US share share market has dropped 19%.

Nick · 00:45So what we're seeing at the moment in the share market, and we've seen always, um, at the moment, it's Donald Trump. Prior to that it was, it was, you know, geographical or political issues with, you know, Ukraine and Russia. Then you've got Covid, then you've got.

Nick · 01:00Uh, the, um, what was that thing around Marty when you were younger?

Nick · 01:04What was it called? The Great Depression? No, that's right. The Great Depression. Um, so there's always volatility in stock markets and it's, um, it's definitely relevant at the moment because Donald Trump is, um, causing a lot of volatility with his gun ho and he's, and he's silly tweets so. What I wanted to discuss today was a concept called dollar cost averaging.

Nick · 01:25It's something that we talk about, uh, every day in our office as financial planners. Um, and it is a proven strategy over the long term, um, that, you know, serious investors, you know, Marty's favorite man, Warren Buffet, Charlie Munger, these guys, um, uh. Uh, definitely, uh, promoters of dollar cost averaging. So I wanted to explain what that is and then if we've got time talk about, uh, rebalancing to take it to another level.

Nick · 01:52But before I rip in, go dollar cost averaging Marty Jace.

Jason · 01:59I'll leave it to Marty.

Jason · 02:00Marty loves this stuff.

Marty · 02:01Marty. I think it's, it's, it's just sensible because whether it's managed fund or EFT on the major indices, um, you can never time the market, uh, one way or the other. Um, so I, I think it all comes. Down to the method of what you're doing and dollar cost averaging is just putting money in the market and over time, you know it's gonna work for you and compound.

Marty · 02:24So, well,

Nick · 02:25the actual question was, do you know what it is? But not only do you know what it is, but you've actually, sorry. Understand the power of it. So I should have known not to go to you because you'd be all over this stuff. Yeah. But yeah mate, you're, you're spot on. And. The dollar cost averaging is, is spreading your money into the market over the long term.

Nick · 02:44So obviously as investors, we all wanna buy when the market dips. Um, there's a couple of things that we need to do to make sure that we, uh, buy when the market dips. Number two, we need to be able to. Be able to predict what it's going to do or not so much dips, but when it, we wanna buy, when the

Nick · 03:00market bottoms.

Nick · 03:00So that, that, that requires us predicting the future, basically, which no one can really do. If they do do it, they generally, it's a fluke. Mm. And also, uh, relies on us having courage, courage to buy the market when we think it's at absolute. Um. Lowest level because what I can tell you is as much as most people think they will buy when the market is down low, because that makes sense, not many people have the courage to do it because they will always think that it's got a little bit more to go and they won't wanna risk their money when they see the market is going down.

Nick · 03:32Um, so. Buying when the market is down or at its lowest absolutely makes sense, but it's very difficult to do it. So dollar cost averaging is a really good strategy to ensure that, um, you don't eliminate risk, but you definitely spread your risk. So to put it into an example, um, if someone came to our business and they said, uh, Nick, we have $200 to invest and we would like to put that in the Australian share market, uh, $200,000 to invest, sorry.

Nick · 03:59And

Nick · 04:00we'd like to put that in the Australian share market. Um, and it's, you know, it's, it's, it's May, 2025. We wouldn't put all of that money into the Australian share market, um, straight away. What we would do is we would suggest that they spread the investment into the market. Depending on their risk profile and depending on how much money, uh, that 200,000 made up of their overall, um, asset base, we would say spread that money out.

Nick · 04:25So hypothetically you might do, um, you know, we're talking, uh, $200,000, you might spread that out over six months at a contribution to the market of around $30,000. So that means every month you're putting in 30, 32,000, whatever that number is to get you to 200,000 over, um, six months. Now what it means if we have an event such as Covid where the market drops by 30% in a, in a one month period, you haven't exposed your entire $200,000 to that 30% market drop.

Nick · 04:58If you had to put

Nick · 05:0030,000 in, you've only put 30,000 in. It's dropped by 30%, so your thirty's gone down to 20 instead of your 200 going down to one 40. I think that is. Is that right? Spot on. Yep. So dollar cast cost averaging works in that way. It also works in the way that if you, um, are going to invest in a stock market, you should cont continue to invest at a certain amount, uh, on a regular basis, whether that's weekly, monthly, annually, even.

Nick · 05:27Buying league, whatever makes sense. But if you put money into CBA today and then you continue to put money into in, into CBA as in the Commonwealth Bank stocks, what you're doing is you are buying them at different periods. So some months you're gonna buy, it's gonna be higher. Other months you're gonna buy it and it's gonna be less.

Nick · 05:44But you are averaging out. Um, your, your purchase price of the Commonwealth Bank, knowing that they're going to go up and down, and again, you're eliminating your risk and you're not exposing everything you've got, um, to one particular, uh, uh, value on a particular day, uh,

Nick · 06:00so far with me making sense? Yep.

Nick · 06:02Yep,

Jason · 06:02big time.

Nick · 06:03So this is why super superannuation is so powerful because what happens with super is the, the decision generally to invest is taken out of our hands. Our employer pays our 12%, um, super into our superannuation fund, and that money is automatically invested every month or every. Uh, fortnight how, depending on when you get paid and when your money goes into the market.

Nick · 06:27So you are dollar cost averaging in your superannuation, um, generally whether you like it or not, which is why superannuation does so well, because it's on a particular strategy. We can't muck around with it. We can't grab the money. We can't decide, oh, now's a good time to go in. Oh, now's not a good time to go in.

Nick · 06:43Oh, I should sell now and move to cash. None of that stuff happens. We just stay invested and we keep on getting invested under the new market price every time our money goes in, which is why super performs really well.

Jason · 06:56Super's a great example. I think, uh, you know, whether it's weekly,

Jason · 07:00weekly, fortnightly, monthly or quarterly.

Jason · 07:02Quarterly would be the, um. Short or the longest period of time, it should be waiting for your money to go into super. Yep. Each quarter based on the rules at the moment. But think about from July 26 onwards when it's, um, payday super. So if you're paid weekly, you're gonna have super hitting your super fund every week, um, to be I invested.

Jason · 07:21So that dollar cost averaging is gonna be quite incredible to to see. When we get to that stage. Yep. It's a really good example.

Nick · 07:27Yep. Yep. And look, we do people's super projections when they're younger and show them what it's gonna be. And, you know, when they're 60, 65 and it, it's quite, um, it's quite difficult.

Nick · 07:38This is to be, to be completely transparent, it's difficult to convince people that that's gonna be their superba. Particularly if you've got a young couple both in professional jobs earning six figures plus in their late twenties, and you can show 'em, the combined super's gonna be, you know, somewhere between 1.5 to 2 million.

Nick · 07:53They almost struggle to. To, to, to grasp that concept and until you show them. Um,

Nick · 08:00so, yeah. You know, and just to put into another example, um, if you're spending $10,000, you know, on the 23rd of May and the CBA costs, um, a hundred dollars, then you're gonna be able to get a certain amount of shares. If you, if you put a thousand dollars into the market or the 23rd of June and the CBA only costs $90 and you're gonna buy more CBA stocks.

Nick · 08:19So, um, a couple of things to think about because people out there will be thinking about this, well, what if the dollar cost averaging costs me money, um, as in a dollar cost average and the market kept going up. Well, that is a definite possibility. Um, if you're in a, a market where it goes up and up and up and you do prolong the investment into the market, it's gonna end up costing you more.

Nick · 08:45Um, that's, that's the reality that people need to face, however. For a lot of people, um, not a lot of people. Um, 99% of the population, um, there's, there's study around the behavioral bias

Nick · 09:00that, um, the pain of a loss is far more, or felt far more than the. Pleasure of a gain. So, you know, we see this in the financial planning business all the time.

Nick · 09:11Um, people kind of almost brush off the returns and the gains. Um, obviously when things are going up, you don't hear from people. And then when you have your annual review, you talk to 'em, they go, oh, that's good. It's gone up. The minute it goes down, they're on the phone. So the, the behavioral bias is Jeff is definitely that.

Nick · 09:29The losses do concern us more because that's the money we've earned and now it's going backwards. Versus I had this amount of money, now I've just got a little bit more. So for us in our wealth business, the trade off of. Uh, possibly getting a bigger gain. Um, the tr you know, that is, that is what's way better, um, not getting that gain than putting all the money in and, and then facing a loss.

Nick · 09:51Mm-hmm. Um, because we know what, what kind of, uh, ramifications that has for people's stress levels and overall, um, mental wellbeing.

Marty · 09:59Well, it's doing

Marty · 10:00some, uh, numbers just on. The importance of managed funds and even, you know, people are investing outside of that in indices like the s and p 500. And I was just messing around with saying, what happens if you only invested when the stock market went down on the 50 day moving average or the 200 day moving average?

Marty · 10:20Just to see what impact it was. And it was really interesting because when people were investing like that, their returns were actually only around about seven or 8%. Because of the fact that, um, they weren't in it for the long term and making fewer deposits. Right? So the dollar cost averaging the consistency.

Marty · 10:40So when the stock market goes down 5%, if you're investing there, it's actually closer to dollar cost averaging. So, but when you look at that as a whole, you know, the s and p 500, I think returns around 13% or something like that. But when you look at it as a whole, what Nick's saying is really important, it's the consistency of input into the

Marty · 11:00market.

Marty · 11:00That's really good and people sometimes want to do that with individual stocks, but the danger of that is you might dollar cost average into oblivion down and further down and further down if it's a bit specky, you know, but, but on an indices or a managed fund, you've got that big spread of basket of stocks that come in and out and is managed by someone.

Marty · 11:20So you've got a lot of protection in that dollar cost averaging happening across the board. So it's amazing that you do get that. Massive benefit of the consistency of the behavior, of the input of funds into the market so you can ride the highs and ride the market in general. So, yeah, it was an interesting exercise, actually.

Nick · 11:38Yeah, it's a, it's a great point. You know, people sitting on cash because they're waiting for that for, for that particular day. Um, and they've missed all those, those gains in the meantime. Um, and actually it's a really good point that you brought forward around, you know, not so much investing in a particular stock, or we're talking about being invested in markets, you know, having some money across the as SX,

Nick · 12:00the s and p bonds, even if you know, if, if, if you're in more of a defensive asset allocation.

Nick · 12:05So, and the other thing that I wanted to, to mention and just to take it to another level. And, and this is what a managed fund will do, and I don't wanna go into advice here, but, um, and ETFs will do this as well, but talking about rebalancing as well. Mm. 'cause a lot of people don't think about that. And you can even do this yourself if you really want to.

Nick · 12:23I'd probably recom recommend you didn't. 'cause it can be difficult. But, um, if we're talking about rebalancing, it's, it's, it's understanding what your particular asset profile should look like. So I'll just give a, an. Probably spoken this before, but I think it's worth mentioning again. Um, I'll give a really basic example.

Nick · 12:43Marty or Jace, 50% of your money, uh, you, you, you decided that for the long term you should be dollar cost averaging into a investment fund that was 50% invested in uss uh, US stocks and 50% invested in Australian stocks.

Nick · 13:00Now obviously your dollar cost averaging so you can con continue to put more money into those stocks.

Nick · 13:05Now what you'll find and what you would've found traditionally, um, is US stocks have done far better from a growth point of view than Australian stocks have been. So if you decided, I want my money split 50 50, at some stage, what's gonna happen is your money is not gonna be split 50 50 because the US stock market has outperformed.

Nick · 13:25So let's say you had a hundred grand in there in 2025. Fast forward to 2026, you've got 120,000 in there, but your US stocks have outperformed your Australian stocks. So you've now got, um, $70,000 worth of US stocks and $50,000 worth of Australian stocks. So US stocks have gone up. Your Australian stocks haven't moved, but your, your split is now, um.

Nick · 13:54Work that out. Jace, you're the accountant.

Jason · 13:5658.3%.

Nick · 13:59So your, your

Nick · 14:00money just by, um, the, just through the result from market conditions, you've now got 58% of your money in US stocks. Only 42%. I know that one Jace put the cal away. Um, only 42% of your money in Australian stocks. So that's not ideally what you wanted.

Nick · 14:18You wanted 50 50. So what a rebalance will do is you will sell the US stocks to get them down back down to 50%. So basically you are taking a little bit of profit off the table from the US A USA stocks, and you're reinvesting that money that you made. Back into Australian stocks. So the idea is when the US market is peaking or going up, you're taking a little bit off the table and you're putting it back into the Australian market, which is cheaper than it was 12 months ago.

Nick · 14:49Now, assuming you've got, um, an ETF or a managed fund, and you've got an entire market and you're not just making a decision on one stock. You are

Nick · 15:00historically guaranteed, almost guaranteed that those Australian stocks are gonna get back to where they were because you've got a whole market. You haven't chosen one stock.

Nick · 15:08So if you want to go that extra level, rebalancing is taking little wins, putting it back into the stuff that was cheaper, and you continue to do that. It fast forward 12 years or 10 years, there might be a situation where the Australian stocks have done more, so you've taken a little bit of money off the table there and put it back into the us.

Nick · 15:25That's what gets you the ultimate. Um, performance and, and these days that's pretty automatic. Um, with ETFs, um, if you've got a balanced, uh, sorry, a mixed ETF with different, um, allocations, they will rebalance. Um, a managed fund. If you're with a financial planner, most people superannuation will be rebalancing all the time.

Nick · 15:45This is stuff that happens in the background, but that's how you, um, that's how you get the ultimate, um, the ultimate result from dollar cost averaging as well.

Jason · 15:54Yeah, I like that a lot. I mean, the accountant in me says, you know, you gotta be wary if you're doing it yourself not to trigger capital

Jason · 16:00gains tax in the wrong way.

Jason · 16:01If you're falling a little bit short and you've held it for less than 12 months and you think Yep, it's time to rebalance, and all of a sudden you're missing out on your CGT discounts. So, um, obviously that's something if you work with an advisor, they're gonna be talking to you about these things. If you do opt for the self-service mentality, you're gonna go away and.

Jason · 16:19You know, it's a, it's a great

Marty · 16:20point, Jay though, like in regards to like selling down to balance as opposed to it automatically happening in the managed fund or the et f it's um mm-hmm. No doubt some tax savings in they Well,

Jason · 16:32and, and it's definitely something that as accountants, we have to explain to our clients when they come in with their ETFs and their managed funds, and they haven't necessarily seen cash, but we told them that it impacted their tax bill.

Jason · 16:42They sit there a little bit confused, like, well, well, no, I, I didn't touch my managed fund. All the money's still invested, nothing's changed. But what they're not seeing is that when things are kind of rebalancing or moving around within the ETF, even in the change in in investments, as things come and go off, you know, the A SX 200 or

Jason · 17:00what, depending on what you're following, um, it'll cause movements in what shares you own or, or what stocks you've got.

Jason · 17:06And then also the rebalancing. So. Um, one to watch when you get your, I mean, accountants are always gonna be sitting there at the end of the year asking for your tax statement from your managed fund. This is usually the movements that are occurring causing, but also would not say to let the tax outcome stop you from implementing this strategy.

Jason · 17:23'cause over the long term, um, you know, any good strategy performed over a long term is gonna help you achieve those goals that you're after. And especially, you know, dollar cost averaging. I mean, I'd much rather see. Especially with business owners that are accumulating wealth or or individuals that have a regular set pay.

Jason · 17:40If you can carve out X amount per week or X amount per month to continue to be invested, that strategy over a long period of time is going to be life changing and it's an absolute game changer. I. Um, it's the ones that, you know, get emotional, um, you know, try and determine the market's timing and, you know, they, they kind of

Jason · 18:00overthink it and they sit on the cash, you know, the stuff that Nick was talking about earlier.

Jason · 18:03And it's often self-sabotaging when. The strategy is to chase returns and to sell things and move based on bad news, um, rather than just a simple strategy of regular investments into something that is set and forget. Um, that's, that's what we wanna see. Uh, well, well,

Marty · 18:20buffet and Munger, you know, approach it that way.

Marty · 18:22I, I find it fascinating that they just say. You know, just put, uh, put 10% in dollar cost average into the, you know, the US market and in the end, the US market will win at the end of the day. But I, I find that, what's interesting about that is that's what super does. I. You know what I mean? That's, that super's that enforced investment.

Marty · 18:41That is the best thing that can happen to any individual because they can't get to it. And I just think, uh, if people aren't self-disciplined to do that themselves, uh, what a great thing that we have. Super. But why not enhance the strategy and, um, look to, you know, look to add to that base strategy, um, through a financial

Marty · 19:00planner and get some managed funds on board.

Marty · 19:01And

Nick · 19:01so there's a few key takeaways there. I think number one is you need to understand, you know, if you're gonna look at rebalancing and, and whatnot, you need to understand what your asset allocation should like, it needs to be appropriate. You need to understand, uh, fees associated with going in and outta funds, um, to Jason's point, tax associated.

Nick · 19:20So, you know, I'm a, I'm a strong believer in, you know, find a. Uh, a product that will do it for you such as an ETF or go see a professional and, and, uh, look at a managed fund. Um, and I think the other key takeaway is just, it just builds a habit and it takes away the guessing game. The only, the only habit you need to implement is transferring a hundred bucks a week or a certain amount a month, whatever it is to an account, and the rest is taken care of for you.

Nick · 19:47And it's pretty easy to look at. Um, an ETF. Online and understand how it's performed. Um, with regulation now all the historic performance numbers are there. Uh, you can see how it's invested. You can see the fees, you can see

Nick · 20:00all this stuff. So. Information is very accessible. Now you just need to create the habit to put the money somewhere, um, and then let the experts do it.

Nick · 20:08And these days with a index based, uh, ETF, it's um, you know, you're pretty safe, um, in the way that you know, not, not that you're guaranteed returns by any means, but you're pretty safe that. They're doing the right thing as far as trying to get you the best return possible, uh, with a great diversified asset allocation.

Nick · 20:27So a couple of key things there, um, before people, you know, try and buy, uh, CBA and the DIP every month, 'cause I did mention CBAA couple of times, but I just thought they were a good example.

Jason · 20:36Well, I think, I think what you said, Nick, because well is around and if you don't have the, I guess the now to create that habit and do it yourself.

Jason · 20:44Manually set it up automatically. Like create, set up the rule in your bank account, do the bpay or the, uh, the, the transfer a hundred dollars a week, a thousand dollars a month, whatever it is, once it's set up in your banking and sent off to the managed fund or whatever, uh, platform you're using. And just

Jason · 21:00pretend it's not there anymore.

Jason · 21:01Let it go and then look at it in a few years time or when you do your review with your advisor. Um, for people that do use particular platforms, just keep in mind brokerage fees. If you, if you are trying to manage it yourself and you're doing little smaller chunks every time you invest or move something around, if you're getting charged a, a platform fee or a brokerage fee, this could be chewing into what might not seem like a lot at a time, but remember that compound effect.

Jason · 21:25Is that every time you make a move or buy or sell something, it could be chewing into your returns. Yeah. Over that long period. And

Marty · 21:30foreign exchange, uh, costs as well if you're sending money overseas as opposed to buying in a Australian et TF. So yeah. Yep. Things like that are important. Yep.

Jason · 21:39And I say the other ones, you know, wouldn't be an account.

Jason · 21:41The accountant in me wouldn't be here if I wasn't thinking from a tax and, and. Savings point of view. But um, even if it's not something personally that you want to have in your own name and you're worried about the tax implications, you could supercharge your super by doing salary sacrifice. So this, this, that'll, that'll then have the same effect, you know, do an extra a hundred dollars a week or

Jason · 22:00$200 a week into super.

Jason · 22:01That's gonna then have the dollar cost averaging kind of extra humming along in your super fund in a great tax environment where those earnings are 15 cents to the dollar, you might be on 45 cents to the dollar personally. So keep that in mind. And if you're sitting down going, shit, this is a great strategy.

Jason · 22:17We've got, you know, Nick talked about the 200,000 spread over a couple of months getting into the market. Again, before you go and do these things, if you, if you're working with an advisor or accountant, financial advisor, there's also things you might consider like a family trust, and that way the family trust might be about growing wealth for the generations of your family.

Jason · 22:37And then that way when there's tax distributions, you, the individual might not be the only one that has to then pay the tax on that wealth. You might be spreading that wealth across your family. So a family trust could be a great strategy for this as well.

Marty · 22:48Yeah, and professional advice is so important here yet again, I know we harp on about it, but even like I was doing some research on people that just generally invest in the market day traders and things like that,

Marty · 23:00and they reckon within 90 days, day traders burn pretty much 90% of their capital because there's no methodology behind it.

Marty · 23:08So it seems easy on the surface to hit the next big winner, but no different to sports bet, right? So it's like, get the right advice, get the right methodology. Get in, you know, re you know, minimize your risks at all costs. And, um, you know, you'll have, uh, you'll have a big upside, you know, in time. Patience.

Marty · 23:28That's it. Slow

Nick · 23:30and steady wins the

Jason · 23:30race. Slow and steady wins the race. Thank you for joining us on another episode of The Numbers Game. Make sure you like, share, subscribe, tell a friend about us, jump onto YouTube and watch a video if you haven't before. Um, and you know, give some comments into that. All those sections follow on Instagram and as always, Jason, Nick and Marty are available on LinkedIn if you wanna connect with us and uh, you know, send us a message, ask us a question.

Jason · 23:52And the. Email address. Hello at the numbers game [podcast.com](http://podcast.com) au. Plenty of ways to get in touch. Until next time,

Marty · 23:58compound interest is the

Marty · 24:00eighth wonder of the world. I'm not sure what the other seven are. Game over.

Jason · 24:06This podcast is for educational and informational purposes only. The conversations are of a general nature and do not qualify as financial or tax advice.

Jason · 24:14We recommend before you make any financial decisions, you consult a licensed professional. Individuals on the podcast may hold positions in the companies discussed. ---