Shelley Hanna: Riding the ups and downs

QUESTION: I am a self-employed software developer. I joined KiwiSaver when it started and I have been contributing $1042 in one lump sum each year in order to get the full Member Tax Credit. I am wondering if my returns would be better if I set up an automatic payment for $90 per month? I am 39 years old.

ANSWER: If you are invested in a conservative fund where the value of the units that you are buying does not fluctuate much over the year, then making one larger investment or lots of smaller ones each year will not make much difference to your returns overall.

However, in a higher risk fund it could make quite a big difference - but you won't know until after your money has been invested. Don't let that put you off though.

As you are 39 you still have 26 years to go before you reach the age of 65. Most investors with a longer timeframe like that can afford to invest in a fund with more growth investments such as shares, which should deliver a higher return in the long run but will give investors a more bumpy ride along the way.

In this case more frequent contributions could be a very good strategy. Your money will buy more units in months when the unit price is down, and fewer when it is up. This is known as "Dollar Cost Averaging".

Let's look at a typical growth fund and see if it would have made much difference over the past 12 moths.

I've chosen the ASB Growth Fund as it ranks in the middle of the pack in the performance rating for "Aggressive" funds (see www.interest.co.nz for rankings).

I have looked up the unit price for this fund over the past 12 months. The price ranges from a high of 0.9664 in March 2011 to a low of 0.8595 in September 2011. Investing your $1042 in March would have given you 1078 units while investing 6 months later would have given you 1212 - 12 per cent more units.

Obviously no investor would be able to time their contribution perfectly to get the most number of units each year, so using Dollar Cost Averaging is a great alternative. In the case of the ASB Growth Fund, the average unit price over the past 12 months has been around 0.92c, so the outcome might have been 5 per cent more using Dollar Cost Averaging than if you'd put all your money in at the high point in March 2011.

Instead of making an annual payment of $1042 you could set up a direct debit for $20 per week - and still get the maximum Member Tax Credits of $521 from the Government. You should find a direct debit form at the back of your scheme's investment statement, or contact the fund manager.

You will no longer have to remind yourself to make that manual payment every year - and human nature being what it is, there is always the chance you may forget. It is also a great way to build a savings habit.

Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free by calling 8703838. The information contained is of a general nature and is not intended to provide specific or personalised advice. If readers have any KiwiSaver questions they can go to www.peak.net.nz or email shelley.hanna@peak.net.nz.