Rand Cost Averaging and how it works

When it comes to investing, many people try to "time the market"—buying when prices are low and selling when they’re high. But let’s be honest, predicting market movements with any real accuracy is extremely difficult, even for seasoned investors.

Diversification is an important aspect when doing portfolio construction to help not only mitigate downturns, but also achieve stable growth over time.

But what happens in these diversified portfolios? This is where Rand Cost Averaging (RCA) comes in.

What is Rand Cost Averaging?

Rand Cost Averaging is an investment strategy where you invest a fixed amount of money (rands) into a particular investment or fund at regular intervals—regardless of whether the market is up or down.

For example, if you invest R1,000 every month into a unit trust or ETF, you'll automatically buy more units when the price is low and fewer units when the price is high.

Lets unpack this with a practical example.

So lets assume that *John wants to invest R1 000 in a particular portfolio every month. For this illustration, we are only going to use a portfolio. Now take a close look at the unit price as this illustrates markets going up and down.

You would notice that on the fourth month, based on the unit price dropping, he bought more units, but when calculating the total units held at that unit price, the investment is sitting on a negative R1 500. But *John sticks to the long term strategy and does not switch out or withdraw from the investment.

On month six, the portfolio recovers, back to R200 per unit, and if you then multiply the total units held with the unit price, the investment value has increased to R8000, which means that the investment is sitting on a positive growth rate of R2000.

So this illustration highlights how unit prices affect investment values, and the importance of how having a long term view works in practical aspects to investment.

I hope this could give you a better understanding of how Rand Cost averaging works in regards to investment portfolios.