Unit trust are often used in financial planning due to the high liquidity it provides. One of strategies often used for unit trust investments is Dollar Cost Averaging.
Under dollar-cost averaging, the investor buys a fixed dollar’s worth of a given security at regular intervals regardless of the security’s price or the current market outlook. The rationale for using this strategy, is that investors concede they cannot outsmart the market. It also assumes that prices will eventually, always rise in the long-term.
Instead of the common practice of buying low and selling high, they do the opposite. Regular purchases are made regardless of the price. They commit a fixed-dollar amount each month (or year) and buy shares at the current market price. When the price is high, they are buying relatively fewer units; when the price is low, they are accumulating more units.
The advantages of Dollar Cost Averaging are:
- It reduces the probability of making one lump-sum investment that is poorly timed with regard to asset pricing.
- It allows investors to neutralize short-term volatility in the broader equity market, as the unit price is being averaged out.
- It takes emotion out of investing
- Little time and effort is required to monitor the market
However, using this strategy on an individual stock without knowing about the company’s details may be risky, because the strategy may encourage an investor to continue buying more stock at a time when they should simply exit the position.
It is recommended that you consult a financial planner to see if Dollar Cost Averaging is suitable for you. Contact your trusted FLA Organization financial planner today.
