Many investors fall into the trap of thinking that they need to first save in order to invest. But this is not the case. Many investment houses offer low minimum investment amounts. An investment from the get-go with a debit order may result in better returns over the long term.
Bekithemba Mafulela, a strategic markets specialist at Allan Gray, explains how a debit order can get you started on your investment journey.
“If, for example, you had invested P500 in the Allan Gray Balanced Fund over a 40-month rolling period by way of a debit order, you would have earned more than by saving for a lump sum of P20 000 in a bank account over the same period,” says Mafulela.
You may get more units when you use a debit order
When you invest, you are essentially buying units. The price of the units varies from day to day. A lump sum payment gets you only that day’s price, which may be high and means you get fewer units. But timing the market perfectly is very difficult to do and waiting for the right moment to invest can mean you miss out on the compounding benefits of being in the market: each month you put off investing waiting for the perfect moment is a lost opportunity.
A debit order solves this problem by allowing you to get the average price of all the months you invest, which is called rand-cost averaging. When you use a debit order, you sometimes pay a high price when the fund is doing well, and you get fewer units, and sometimes you pay a low price, and you get more units. Over time, you pay the average price.
Building a habit and taking emotion out of it
Using a debit order takes the emotion out of your decision-making. You don’t have to think about it or start the investment process again. You need to maintain your debit order – but the habit of investing builds up automatically and over time your budget adjusts. If you need to make changes in your investment, such as when you receive a bonus, you can also make a once-off additional contribution or change your debit order.
The most important thing to remember is that the best time to start your investment is now. Trying to accumulate a lump sum may mean that you miss out on returns in the long term.