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RCA is a wealth building strategy that is achieved by investing at regular intervals over a long period. Collective investments such as unit trusts or exchange-traded funds are vehicles used for RCA - the structure of these funds almost seems to have been designed with RCA in mind.

The easiest way of implementing RCA is to set up a debit order at the bank to coincide with the payment of your salary, thereby putting investing at the front of the queue and not the back as it is so tempting to do! Taking away the decision to save each month by automatically saving removes the temptation to spend it on something else.

The amount of money invested monthly can remain the same over time, but the number of units purchased varies based on the market value of the underlying assets in the collective investment. When the markets go up, you buy fewer assets per rand invested because of the higher cost per asset. When the markets go down, the situation is reversed and you can purchase a greater of number of assets because of the lower cost per asset.

By doing this over a long period you get a reducing average cost per asset over time, meaning you don't have to monitor market movements on a regular basis.

While small contributions may not seem impressive at first glance, they enable investors to adopt the habit of saving, and can really add up over the course of a lifetime thanks to compounding. According to Albert Einstein compounding is the eighth wonder of the world. Compounding takes place when an asset has generated earnings, which are then reinvested to generate their own earnings.

To facilitate a long-term strategy for investing lump sum investments, collective investment companies' funds offer investors the ability to place the initial investment into a money market fund from which predetermined amounts are automatically invested into a designated specialised unit trust portfolio each month. This is referred to as "phasing in" of an investment.

RCA is a convenient, cost-efficient solution that mitigates concerns about investing a large sum at the wrong time. Often if a lump sum was invested all at once, the investor would face the risk of declining financial markets taking a huge chunk out of the capital.

It has to be emphasised that RCA is a long-term investment strategy. Even though financial markets are in a constant state of variance, they tend to show steady growth over the long term. Bear and bull markets can last for long periods of time. Because of these trends, RCA is generally not a particularly valuable short-term strategy.

RCA will ensure that your average cost per unit represents both the benefits of a bull market and the discounts of a bear market.

If investors were able to predict when the market had bottomed, there would be no need for RCA. But as this is very difficult, RCA provides a great way of smoothing out the bumps of the market to ensure a reasonable long term return.

Practical example

An investor implements a Retirement Annuity of R1,000 per month on 1 January  2005 and his portfolio is entirely invested in the Allan Gray Equity Fund. The closing selling prices per unit from 1 January 2005 to 1 January 2009 is reflected below:

Date Sell price per unit
01/01/2005 R117.30
01/01/2006 R166.56
01/01/2007 R232.86
01/01/2008 R267.60
01/01/2009 R220.28

If it is assumed that the underlying assets in the Allan Gray Equity Fund remains constant and that the fund manager adopts a passive investment approach, the investor will have purchased a different number of units each month, thereby reducing his/her long-term average cost of his/her investment. Based on historical data the assets in the Allan Gray Equity Fund should appreciate in value over the long term and this will provide a reasonable return on his/her investment.

Our clients' monthly RA and unit trust contributions incorporates the principle of RCA and this should ensure reasonable returns over the long term. Please feel free to contact us should you require more information regarding this.