Unlike investor A, investor B decides not to make a fixed monthly contribution but intends to increase his contribution by 50 percent for every five percent that the market declines from its previous high. He decides to limit the increase to four times his contribution. What is striking is that both cumulative market contributions for 75 months (up to 30 September 2006) were less than their cumulative monthly contributions.

During the period investor A contributed capital of R75 000 and the market contributed growth of R76 000, which brought the portfolio to R151 000. Investor B contributed capital of R108 000 and the market contributed growth of R116 000, bringing the portfolio value to R224 000. During the period equities returned 19.6 percent per annum. Investor B achieved a return of 20.8 percent per annum and investor B 22 percent per annum.

According to Pyper this calculation was applied to the period starting when financial markets had stabilised following the 1998 emerging-market crisis when equities were sold off sharply in a very short time. To test the calculations? validity, they were applied across a different period, from 31 March 2002, shortly before the bear market of 30 June 2002, to 30 April 2003.

Investor A vs. investor B

For 52 months (up to 30 June 2006) market contributions were less than investor A?s monthly contributions. Investor B?s cumulative market contributions were less than his monthly contributions (indicated by the dotted line in the second graph) for only 47 months (up to 31 January 2006).

During this period investor A contributed capital of R52 000, while the market contributed growth of R52 000 to bring the portfolio value to R104 000. Investor B contributed capital of R73 000 and the market growth of R82 000, bringing the value of the portfolio to R155 000. By 30 June 2006, when investor A?s monthly contributions and market contributions broke even (indicated by the solid line in the second graph), investor B had made capital contributions of R76 000 and the market had already contributed R96 000 to bring the portfolio value to R174 000. During the period equities returned 20.4 percent per annum. Investor A earned a return of 29.8 percent per annum and investor B 30.4 percent per annum.

The main difference between the two periods is that the bear market from 30 June 2002 to 30 April 2003 occurred late in the first investment term, but occurred early in the second investment term. "The effect thereof on the final results shows that the benefits of rand cost averaging only came into play late in the first investment term but fairly early in the second term," says Pyper.

Conclusion on page three...