51) Dollar Cost Averaging Concept

51) Dollar Cost Averaging Concept in Unit Trust Investment.

Dollar Cost Averaging is a concept that helps to reduce the risk of wrong market timing. It is investing regularly with the same amount over a long period.

Regularly usually means on a monthly basis. It depends on the source of investment money. The same amount is used to have the same impact on each investment. A larger amount gives a larger impact to the investment and vice versa.

Dollar Cost Averaging also helps to gradually increase your wealth. Most people will not have a large amount of money to invest at any one time. Most people will have one small amount of money at all the times.

In a volatile market, the fund prices fluctuate up and down. By investing a large sum at any one time, you are at the risk of investing at the high point.

By investing regularly at different market conditions, you avoid the risk of investing at the high point. However, you also miss the opportunity of putting all your money at the market lowest point. As the market is unpredictable, you will never know when the highest and lowest point is. Only after it happened that we will be able to tell.

Here’s a sample table of price fluctuations and the impact on the Average Cost. Let’s assume you invest $100 monthly. At different prices, you will get different quantity of units.

Over the months, the total units bought at different prices will accumulate (4824.56). To get the Average Cost per Unit, you divide the total amount invested by the total units accumulated (1200/4824.56=0.2487).

You get a Average Unit Price (0.2487) lower than the mathematical average of the unit prices (0.2500).

 
This is because you get more units at lower prices and less units at higher prices. However, your Average Cost per Unit, ACU (0.2487) will be somewhere in the middle of highest price (0.2800) and lowest price (0.2200).

If you had invested $1200 in one time, your average cost per unit is the same as the price you invested. If you invested lump sum in Month 5, then your Average Price per unit is at 0.2700, much higher than the overall Average of 0.2487.

So, now you can see the benefits of doing Dollar Cost Averaging. You do not have to rely on luck or much experience to invest at a good price

Please note that the above graphs are for illustration purpose only. Past performance are not indication of future performance.

Please be reminded and be aware that all investments have risk. Do consult your professional investment and financial consultants.