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Investment Management Using Dollar Cost Averaging

Investment Management: Dollar Cost Averaging
Dollar Cost Averaging is an implementation strategy to commit a fixed amount of money at regular intervals to an investment. Hence DCA involves a continuous, disciplined investment in a portfolio regardless of fluctuating price levels. Investors buy more shares when prices are low and fewer shares when price are high.

What this simply means is that you start a savings plan with a unit trust and you devote a fixed dollar amount towards purchasing it every month (or week, or quarter, whatever the predetermined period may be)

The example below as illustrated:

Frequency Amount Invested Price of Unit Trust Units Bought
1st month $200 $1.80 111 units
2nd month $200 $2.00 100 units
3rd month $200 $1.50 133 units

$600 $1.74 (= $600 / 344 units) 344 units

Frequency Amount Invested Price of Unit Trust Units Bought
1st month $600 $1.80 333 units

Averaging allowed you buy the units at a lower average price and thus over time; the portfolio should accumulate at a cost lower than the current market price.

4 Keys to effective Dollar Cost Averaging Investment Implementation

1. Begin Investing immediately
Instead of waiting for the right time, you may benefit from beginning today. Over the long term, whether the market was up or down when beginning an investment program has proved to have made relatively little difference.

2. Focus on Accumulating Funds

A drop in a fund's unit price is a bad news for someone who plans to sell but it can be a good news if you are buying units. That's because lower prices mean you can buy more units with your fixed investment amount unit that have the potential to grow in value.

3. Prepare to Weather Market Declines

Bear in mind that DCA usually works best over long periods of time, so you must be prepared to commit financial resources and have the resolve to make contributions on each appointed date, even during an extended down market.

4. Make Volatility works for you

When you average this way, you are making the inherent volatility of markets work for you. It is impossible to buy low and sell high all the time. So the best solution is not to be caught committing all your money at the high point of a market cycle. If you did, you may not be able to make any profit until the next cycle comes along. By averaging, the price of your units will tend towards the middle price of the market cycle that you are in. You will still get to enjoy a pretty good upside.

So instead of stressing out over the volatility of the market, you can rest assured knowing that your savings plan actually works for you in those volatile conditions! That's what unit trust investing is meant to do. Give you more money and less stress as human emotions frequently prevail over rational behavior.

Start an RSP to fund your long-term objective

Many of us would need to fund some long-term financial objectives such as retirement or children education over the next 10 to 30 years. Starting an RSP, i.e. setting aside a monthly amount to invest, takes advantage of DCA over the long term as you focus more on accumulating units rather than worrying whether it is a good time to invest.

   

 

 


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