Question:
I started investing in Unit Trusts about a year ago with varying success. Someone told me about the concept of Rand Cost Averaging (RCA) whereby you keep buying units for the same amount each month. He said that by doing this you can bring down your average costs.

How does it work?

Answer:
If you are a long-term investor this can be an effective way to smooth out the cost of building up your unit trust portfolio.

Rand Cost Averaging (RCA) should help you to stop worrying about price fluctuations (volatility) in the unit trust market. By investing the same Rand amount each month you will buy fewer units or stocks as prices rise and more units as prices drop. This process will 'average' out your portfolio holding costs.

To consider this approach ask yourself if you're going to be a buyer or a seller of unit trust funds over the next few years.

As a buyer you want to buy low and a market drop can be a terrific opportunity to do just that. Yet following a market drop many erstwhile buyers, rather than continuing to scoop up the units on the cheap, choose to become panic sellers even though they won't need the money for perhaps another 10, 15 or 20 years. Panic selling only turns paper losses into real losses. Sellers might seriously regret their decision should the market bounce back quickly. If you are engaged in regular monthly investing, perhaps through your retirement annuity (RA) or provident plan at work, you are already Rand Cost Averaging.

For the long-term investor it is virtually impossible to predict market highs and lows. If market timing could be practised reliably many more managed funds would outperform the indices. Even in the United States' longest bull run only a small portion of the top managed funds outperformed their benchmark index.

Financial markets are volatile and unpredictable which is why it is essential to diversify geographically as well as across the asset classes. You should phase in your investments over time. In times of market stability this may be done over a short period of approximately three months. In volatile markets an investment should be phased in over a longer period of approximately six to nine months.

Financial planners will often choose the RCA route to avoid market timing, but the truth is that Rand Cost Averaging is a form of market timing. It has been argued that RCA serves more to assuage the conscience of the financial planner than it has served the financial interests of the client. However, this can be an effective way to manage your portfolio if you are new to the world of investing and do not have the will or capacity to study the markets.