Wednesday, April 9, 2008

Dollar Cost Averaging Priciple in Unit Trust Investment

Dollar cost averaging (DCA) is a good investment-building strategy. By investing a fixed amount of money at regular time intervals over a long period, investors are lessening their exposure to market risk.

There are three keys to any dollar cost averaging plan for the common sense investor: 1) regularity 2) frequency and 3) long-term consistency. Invest the same amount on the same days of each month in the same mutual fund or stock. The more frequently you invest, the more opportunities you have to take advantage of dollar cost averaging. Finally, it is essential that you keep-up dollar cost averaging over the long term.

The more fine grained your investing frequency via dollar cost averaging, the better. In other words, it is better to invest $100 on twelfth days of the year than $1200 on one day in the year. The reason for this is that you have more opportunity to naturally buy more shares at lower prices and fewer shares at higher prices.

When it comes to making dollar coast averaging strategies for your investments, no other investment option is as good a fit as unit trust funds. In fact, the structure of unit trust funds is such a way that they are quite perfect for a dollar cost averaging strategy. This is particularly true because of the fact that mutual funds usually don’t involve transaction fees, and small, systematic investments are encouraged.

For those who want to use a DCA method for their investments, it would be a good idea to employ certain strategies to maximize the benefits that are given by dollar cost averaging.

For the average investor, a good long-term strategy is to regularly invest a portion of salary or other income through DCA. Even though investing a lump sum at the most crucial time could eventually bring in more returns to your investment compared to doing dollar cost averaging, it is very hard to determine that moment of opportunity when the time is right. Even experts fail. In fact, it is not uncommon to hear horror stories from people who purchased a lump of shares at the peak of a market only to see the value decrease for several months or even years. As a long-term strategy, DCA is more appropriate to help increase return potential and lower the average cost per share.

One good benefit is that with a dollar cost averaging investment stance, you can breathe a little easier and feel more comfortable taking the safe option especially when the market is very uncertain. Nothing is more reassuring knowing that you have made a sound investment decision. But also keep in mind that a dollar cost averaging stance means that you need to make continued investments. You must assess your ability to continue purchasing even through low price level periods. An investor must remember that the market will always undergo bearish or bullish periods that can last for months, if not years. It is this constant movement of the investment market that makes dollar cost averaging a good strategy only for long-term investments. It is also why it is not a good choice for those who are looking for a short-term investment strategy.

For those who want to get into a dollar cost averaging strategy with unit trust scheme, certain facts should also be considered. Even though unit trust funds, because of its low, percentage-based expense ratios, have been identified as the perfect vehicle for dollar cost averaging it would still be a good idea to exercise a lot of prudence and caution. There are unit tust funds that charge low balance fees, sales loads, purchase fees and even exchange fees. It is a good idea to read the disclosure materials given to you prior to making any investment decisions. You should also make sure that you are aware of all the incurred expenses that are associated with your investments.

Ultimately, strategies that are based on a dollar cost averaging investment stance require patience and a healthy dose of self-restraint for interested investors.