By Rory Rostant
Corporate Communications Manager, Reputation Management
Unit Trust Corporation
In investing, why a little $ goes a long way
Putting all your money in an investment all at once – thinking it will only go up – can be a very risky idea. The reality is that you cannot predict market behavior. But by following a simple practice known as dollar cost averaging, you can protect yourself against market fluctuations and taking unnecessary risk in the market.
Try using the term “dollar cost averaging” in a conversation and you are certain to draw puzzled looks. Truth is, it’s an investment technique that many successful investors already practice. It means, even if prices are rising or falling, we can simply invest a fixed amount of money at fixed intervals over a long period.
Let’s say that you want to invest $1,500 in a year. Instead of putting everything in all at once, invest $125 per month. By putting away small sums out of every paycheck, this strategy tends to be considered one of the most efficient ways people can invest instead of the “buy-all-at-once” approach. 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.
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. Expressed another way, when the markets are up, you buy fewer units per dollar invested because of the higher cost per unit. When the markets are down, the situation is reversed, and you purchase a greater number of units per dollar invested.
Fortunately for investors, this is a smart, time-tested way to keep investing even in the face of today’s financial challenges as long as you have a good, long term perspective.
For one thing, it’s means committing yourself to investing a fixed amount of every weekly, fortnightly or month salary towards a specific goal, such as: your retirement, children’s education or even a vacation.
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. By buying a fixed dollar amount on a regular schedule, your focus is on accumulating assets on a regular basis, instead of trying to time the market.
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.
When you open an account at the Unit Trust Corporation your money is used to purchase units in one of our funds. The opportunity exists for the value of the fund to increase, thereby increasing the value of each unit. This means over the medium to long term, units can be worth more than you paid for them when you are ready to sell or convert your units back to cash.
Tips for Dollar Cost Averaging:
- Decide exactly how much money you can invest each period (i.e. weekly, monthly or quarterly). 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 medium to long term, preferably five to ten years or longer; remember, to benefit from dollar-cost averaging one should adopt a medium to long term investment horizon.
- At regular intervals (weekly, monthly or quarterly), invest that money into the security you’ve chosen. To make it easier set up a standing order or salary deduction so the process becomes automated.
- One advantage to dollar-cost averaging is that by investing mechanically, you will take the emotional component out of your decision-making. You will continue on a preset course of buying a certain dollar amount of your preferred investment irrespective of how the market performs. This way, you will not bail out of your investment when the price falls, but rather see it as an opportunity to acquire more units at a lower cost.