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Are you living and working abroad? Are you planning for your retirements? Are you simply interested in setting up a good savings plan?
One of the most efficient and painless ways of building capital, is to systematically save a portion of your income each month.
Regular and disciplined contributions to an offshore savings scheme are probably the best way to develop a substantial nest egg and achieve your long term goals.
Not only are you able to benefit from the opportunity of building up your capital in a tax efficient environment but also reduce the risk by investing your capital in smaller amounts on a regular basis.
Global economic trends and political turmoil have caused much market volatility in recent years. These are uncertain times that we live in, and stock markets do not generally respond well to uncertainty. It is easy to panic in the short-term as stock markets fluctuate, but it’s always important to focus on what your goal is and why you started investing. The ultimate goal is to achieve your long-term financial plan.
It’s easy to become preoccupied with current market volatility and make hasty and rash decisions based on fear and emotion. Some people try to predict how the markets will react and switch their investments or try to buy at the bottom of the market, but the reality is very few achieve the correct timing. Financial markets can be volatile and unpredictable especially in uncertain times and can move up as well as down very quickly which makes predicting such movements very difficult, but it is also worth noting that rises and falls are part of normal stock market life.
Saving a fixed amount on a regular basis is an effective way to save and helps to ‘smooth out’ fluctuations in the market, and you get access to top fund managers for relatively small premiums. We call this method Unit Cost Averaging, also known as Dollar Cost Averaging.
Market fluctuations affect the cost of the units in funds. A unit is basically a share in a fund. With every regular contribution you make, you purchase units of the fund to the value of your contribution. When the fund price is low, it means you can purchase more units. Higher prices mean you purchase less units for your money.
Over time, the more units you purchase, the more profit you will make when markets are favourable. By investing regular amounts into a long-term savings plan and making use of Unit Cost Averaging and the smoothing effect, your investments should grow at a better rate than trying to time the market with a once-off lump sum.
This example shows how Unit Cost Averaging’ (UCA) works. John uses the UCA approach while Simon invests a lump sum at the start of the year. John and Simon invest £500 each month into a fund to show how the strategy works.
| John | Bill | |||||
|---|---|---|---|---|---|---|
| Month | Amount invested | Fund Unit price | Number of Units bought | Amount invested | Fund Unit Price | Number of Units bought |
| January | 500 | 1 | 500 | 6000 | 1 | 6000 |
| February | 500 | 1.1 | 455 | 0 | 1.1 | 0 |
| March | 500 | 0.9 | 555 | 0 | 0.9 | 0 |
| April | 500 | 0.8 | 625 | 0 | 0.8 | 0 |
| May | 500 | 0.7 | 714 | 0 | 0.7 | 0 |
| June | 500 | 0.6 | 833 | 0 | 0.6 | 0 |
| July | 500 | 0.8 | 625 | 0 | 0.8 | 0 |
| August | 500 | 1 | 500 | 0 | 1 | 0 |
| September | 500 | 0.8 | 625 | 0 | 0.8 | 0 |
| October | 500 | 0.5 | 1000 | 0 | 0.5 | 0 |
| November | 500 | 0.7 | 714 | 0 | 0.7 | 0 |
| December | 500 | 1.3 | 384 | 0 | 1.3 | 0 |
| Total | 6000 | – | 7530 | 6000 | – | 6000 |
John invests £500 a month for one year into the fund. At the end of the year, John has acquired 7,530 units. Currently, using the December unit price, the units have a value £9,789 (7,530 x £1.30)
Simon on the other hand invests a lump sum of £6,000 in January. His investment acquires 6,000 units in the same fund. By the end of the year, using the December price, the units have a value of £6,500 (5,000 x £1.30).
As you can see, by spreading his investments over the year John is £3,289 better off than Simon. For the same investment he has benefited from the effects of UCA.
Smooths out the extreme fluctuations of volatile markets
Buy more units when markets are low thus increasing the number of units in the fund
More units mean higher profits when markets perform well
Allows investors to spread smaller investment amounts across a wider choice of funds
Access to top fund managers at lower costs
Purchase funds at lower costs than investing directly with the fund houses
Reduces administration as there aren’t multiple fund managers
Build up capital in a tax efficient environment
Regardless of stock market volatility, it’s important to review your investments on a regular basis to ensure they are still in line with your future goals and risk appetite. As your personal circumstances can change throughout your lifetime, you should review your chosen investment funds yearly to ensure they still meet your needs. The funds you choose to invest in now may not be right for you later in your life.
By keeping in contact regularly I will recommend any adjustments or changes needed to your portfolio according to your current individual circumstances and financial goals at the time.