Why investing at regular intervals works
Use the term “dollar cost averaging” in a conversation and chances are you would encounter puzzled looks. Truth is, it’s an investment technique that many successful investors already practice without even realizing it. Few investment strategies are more ingrained than dollar-cost averaging which simply means investing a fixed amount of money at fixed intervals of time over a long period, through thick and thin.
This type of systematic investment program is familiar to many UTC investors, as they practice it by investing in the array of mutual funds that are managed by the Corporation. The Children’s Investment Starter Plan and Student Investment and Protection Plan, which offer the opportunity to invest in shares of local companies trading on the stock exchange, government and government guaranteed bonds, short term securities and foreign equities, cater for dollar cost averaging by allowing the investor to invest a fixed sum over a period of time.
The technique can also be applied to UTC’s Pension Plus, the Individual Retirement Unit Account (IRUA) and Universal Retirement Fund, whose funds are invested in stocks, bonds and money market instruments , and are avenues to build your retirement savings over the long term.
Instead of investing assets in a lump sum, the investor buys smaller amounts over a longer period of time. This spreads the cost out over several years, providing a measure of insulation against changes in market prices and in this way one is able to minimize risk to one’s investment.
For one thing, it’s the only way most people can invest—by putting away small sums out of every paycheck. That’s a sensible approach, for example, if it means committing yourself to investing a fixed amount of your salary every month toward your retirement or children’s education. An investor that puts money into a UTC mutual fund in effect owns a fractional interest in every one of the stocks or bonds or other assets that make up that portfolio.
Participation by investors is represented by units which are the equivalent to the proportion of a fund’s portfolio comprising equity and fixed income securities. When you open an account at the Unit Trust Corporation your money is used to purchase units in the fund. In the Growth and Income Fund, for instance, when an investor buys units, that investor buys into shares of local companies trading on the stock exchange as well as government and government guaranteed bonds, short term securities and foreign equities.
The opportunity exists for the value of the fund to increase, thereby increasing the value of each unit. What this means is that units can be worth a lot more than you paid for them when you are ready to sell or convert your units back to cash.
Investing a set amount of money each month ensures that you will buy more units when they are low and fewer when they are high. When the markets are up, you buy fewer units per dollar invested to the higher cost per unit. When the markets are down, the situation is reversed and you purchase a greater of number of units per dollar invested. It’s a strategic way to invest because you buy more units when the cost is low, so you get an average cost per unit over time, meaning you don’t have to invest the time and effort to monitor market movements and strategically time your investments.
All this enables investors with tight budgets to invest small sums on a regular basis without worrying about their portfolio. While small contributions may not seem impressive at first glance, they enable investors to get into the habit of saving, and can really add up over the course of a lifetime.
Regardless of the amount of money that you have to invest, investors must remember that to benefit from dollar-cost averaging one should adopt a medium to long term investment horizon.. In order to begin a dollar cost averaging plan, you must do three things:
- Decide exactly how much money you can invest each month. Make certain that you are financially capable of keeping the amount consistent; otherwise the plan will not be as effective.
- Select an investment that you want to hold for the long term, preferably five to ten years or longer.
- At regular intervals (weekly, monthly or quarterly works best), invest that money into the security you’ve chosen. To make it easier, set up an automatic withdrawal plan so the process becomes automated.
The reality is that many potential investors could save themselves a lot of time, effort and money by beginning an investment plan that caters for dollar cost averaging.