6 08 2009

Learn how to benefit from the volatility of the stock market

What is Ringgit Cost Averaging?

Ringgit Cost Averaging (RCA) is an investment technique intended to reduce exposure to risk associated with making a single large purchase by investing a fixed amount on a particular investment (such as unit trust) at regular intervals (either monthly or quarterly), regardless of the unit price.

For example, you can choose to transfer RM100 to RM200 from your salary to a unit trust fund or you can even make a RM500 or RM1, 000 investment every quarter. The amount and frequency of your investments depend on your financial means and future goals.

How Ringgit Cost Averaging Works?

More units are purchased when prices are low, and fewer units are bought when prices are high. The premise of ringgit cost averaging is that the investor wants to safeguard against the market losing value shortly after making his or her investment.

Although ringgit cost averaging can be an effective way of investing, it does not assure a profit or protect a loss in a declining market. Furthermore, you must continue to purchase units both in market uptrend and downtrends in order for the strategy to be effective. Hence, you should choose an amount that you feel comfortable investing under all market conditions.

To illustrate ringgit cost averaging better, let’s say you want to save RM12, 000 each year for your child’s education fund. Instead of investing it in a lump sum and bear the risk of entering when the market is high, you decided to invest RM1, 000 into a unit trust fund each month as shown in the chart:

In this example, the average unit price over the period was RM0.1983 but the average cost to you was RM0.1923, resulting in a 3% lower price to the average unit price over the period.

Paul Clitheroe,
“Ten Key Steps to Wealth”, 2002.




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