Question: “Today I met a financial adviser for retirement planning who encouraged me to do dollar cost avearging. I was very impressed with him. I told the adviser that I got $500,000 to invest for retirement. He instead recommended that I 'go slow' by investing a small amount in order to avoid investing at the peak of the market. I understand its called dollar cost averaging. I was recommended to invest $1500 a month. I am amazed that he did not take all my money but only a very small amount.”
Answer: I checked the product you bought. It is an investment-linked policy designed for 30 years holding period. Meaning, you have to pay $1500 a month for 30 years otherwise the cost will be very large. At your age of 59 years old, it means you have to continue to pay this regular premium until you are 89 years old! In initial years, your surrender value is little or none at all. The total distribution cost (which is approximately the total commission) is $20,000.
If you had bought an annuity as lump sum of $500,000, the total distribution cost is $7500. If you had bought unit trust worth $500,000, the total distribution cost is $0 because sales charge these days is 0%.
Dollar cost averaging is usually done over one market cycle. While the length of each market cycle is unknown until it has come to past, dollar cost averaging is usually done over just one to two years. It is no point doing dollar cost averaging over 30 years. The bulk of your money would be deflated due to the erosive effect of inflation.
Do you think the adviser have your interest at heart? You may like to read this Hong Kong news article: Hong Kong consumers angry after being sold complex insurance product ILAS
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