Dollar Cost Averaging

What is Dollar Cost Averaging Principle?

Dollar Cost Averaging (DCA) is when a unitholder invests a fixed amount of Ringgit in a unit trust fund regularly. For cash investors, you can instruct your bank to direct debit a fixed amount monthly to invest into a named unit trust fund. For EPF investors, you can practise DCA by investing once every three months as permitted by EPF.

For DCA, you are buying a fixed ringgit amount, say RM100 of a particular trust fund on a regular schedule, regardless of the unit price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.

Eventually, the average cost per unit of the trust fund will become smaller and smaller. Dollar-cost averaging lessens the risk of investing a large amount in a single investment at the wrong time. The idea of Dollar Cost Averaging Principle is to solve the problem of TIMING.

What is the advantage of applying the Dollar Cost Averaging Principle to a regular savings plan?

a) No timing problem.
b) The total number of units will be more in the long run.
c) The average cost will be lower in the long run.

Why NOW?

As the prices of shares now are low, the unit prices of equity-based unit trust funds are also low. Many unitholders, however, are worried and are refraining from investing NOW. Acutaully, NOW is the best time to invest, as every one of your Ringgit will bring you a GREATER number of units! This is what the saying BUY LOW SELL HIGH implicates!

If you want to know more investment in Unit Trust, kindly email me for more details at shpoh88@gmail.com.

[This post was first published on Sept 7, 2008]