DOLLAR COST AVERAGING
One of the basic strategies in investment is the Dollar Cost Averaging. Dollar cost averaging is a technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. Instead of investing assets in a lump sum, the investor works his way into a position by slowly buying smaller amounts over a longer period of time. More shares are purchased when prices are low, and fewer shares are bought when the prices are high This spreads the cost basis out over several years, providing insulation against changes in market price. Eventually, the average cost per share will become smaller and smaller. Dollar-cost averaging lessens the risk of investing
a large amount in a single investment at the wrong time and also discipline investor to invest regularly. Now let us see an example of how dolar cost averaging work on rising, fallen and fluctuating market.
RISING MARKET (BULLISH)
|
PRICE |
UNIT |
AMOUNT INVESTED
(RM) |
| 2 | 3 000 | 6 000 |
| 4 | 1 500 | 6 000 |
| 6 | 1 000 | 6 000 |
| 8 | 750 | 6 000 |
| 10 | 600 | 6 000 |
| TOTAL | 6 850 | 30 000 |
Average cost per unit = RM 4.38
On a rising market when the unit price of the fund increase the amount of fund that you will get will become fewer but it is still can give you an advantage. Normally when the market are low, most people will become afraid to invest because of the fear of the fund price will keep on falling. What even funnier is that when the market rise there are still people who are afraid to invest because they think the price is too high and over price.
Example:
Luke invested RM 6000 in shares at a price of RM 2 per unit. When the market went up he doesn’t make any additional investment because he think the price is too high. In the end when the price reached RM 12 he sold all his shares and take home a profit of RM 30 000. Compare this to Jenny, she consistenly invest the same amount of RM 6000 during the bullish market at the price of RM2, RM4, RM6, RM8 and RM10. When the market reached RM 12 she also decided to sell her shares and make a profit of RM 52 200 . Although in term of percentage Luke has make a remarkable return of 600% compare to Jenny of 274%, Jenny is still the true winner here because she make the higher amount of money then Luke. So ask your self who do you want to be ? Luke who enjoy the high percentage of money or Jenny who enjoy the most sum of money.
Sheyzal Azman
Financial Consultant
sheyzal@yahoo.com
FALLEN MARKET (BEARISH)
|
PRICE |
UNIT |
AMOUNT INVESTED
(RM) |
| 10 | 600 | 6 000 |
| 8 | 750 | 6 000 |
| 6 | 1 000 | 6 000 |
| 4 | 1 500 | 6 000 |
| 2 | 3 000 | 6 000 |
| TOTAL | 6 850 | 30 000 |
Average cost per unit = RM 4.38
Now let us see the benefits of unit cost averaging:
Let say Mr. Sam invest a lum sum amount of RM 30 000 at a price of RM 10 he will get 3000 units therefore his average price per unit is RM 10. Suddenly the market fall , Mr Sam got panic and sell all his investment for RM 4 per unit. Therefore he end up losing RM 18 000. Compare it to Mr. Gan who is planning to invest his capital of RM 30 000 by using the dolar cost averaging stratergy. He start with RM 6 000 at a price of RM 10 exactly like Mr. Sam, and as what happen to Mr. Sam the market become bearish. Knowing the benefit of dolar cost averaging Mr. Gan do not panic as Mr. Sam but instead he keep on investing the same amount of RM 6 000 when the price fall as what u can see on the example given on the fallen market situation. Because of the fallen price Mr. Gan manage to collect more unit and after he invest all RM 30 000 that he has, his average price per unit has drop to only RM 4.38 per unit. Now not only that Mr. Gan has manage to reduce his cost per unit for his investment he also will surely make a handsome amount of profit when the market recover
FLUCTUATING MARKET
|
PRICE |
UNIT |
AMOUNT INVESTED
(RM) |
| 10 | 600 | 6 000 |
| 4 | 1 500 | 6 000 |
| 2 | 3 000 | 6 000 |
| 4 | 1 500 | 6 000 |
| 10 | 600 | 6 000 |
| TOTAL | 7 200 | 30 000 |
Average cost per unit = RM 4.17
As you can see from the example when the price per unit or share rise in a rising market and you invest the same amount of money the number of unit or share that you will get will be fewer. On the other hand when the market is falling and you continue to invest the same amount of money gradually the number of share or unit that you will get will increase. A fluctuating market is actually a combination of a rising and falling market therefore the amount of unit or share you will get depend on the price that you invest. Most of the time your investment in unit trust and shares will be in this situation. As long as you keep on practicing the dollar cost averaging you can get both the benefit that you can get during a bullish (rising)and bearish(fallen) market.
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