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Very often when you start investing, you find yourself buying in at the top. Then,
the markets tumble and you sell - right smack at the bottom. How can you avoid risks
like these? If you do not wish to be bothered by strenuous market volatility, consider
dollar-cost averaging - an investment strategy that takes advantage of market changes.
Dollar cost averaging can be an effective strategy for long-term investment planning.
There is nothing mystical about the strategy. You invest a fixed sum of money regularly
regardless of whether the market is up or down. The rationale is the steady investments
lets you purchase more shares when the prices are low and less when the prices are
high.
TABLE 1
|
Investment (RM)
|
Price (RM)
|
No. of shares acquired
|
|
1,000
|
10.00
|
100.00
|
|
1,000
|
15.00
|
66.67
|
|
1,000
|
6.00
|
166.67
|
|
1,000
|
12.00
|
83.33
|
|
|
|
|
4,000
|
43.00
|
416.67
|
|
|
|
| Average market price |
10.75
|
|
| Average cost per share |
9.60
|
|
(RM4,000/416.67)
Table 1 shows how this time tested method is able to enhance your investment returns.
The formula is the willingness of investors to invest regularly regardless of market
trends. When you invest regularly, you can pat yourself on the back for having earned
some profits. What happens if the prices go down?
Don't panic and sell, congratulate yourself on the opportunity to pick up some bargains.
From the example, over time your average entry cost is RM 9.60 while the average
market price was RM 10.75. This method is even more effective if you invest in unit
trusts and unit trusts have diversified portfolios and tends to bounce back from
market disasters while individual stocks could fall and stay down for years.
In a nutshell, the method of dollar-cost averaging takes the worry out of the ups
and downs of the markets. Of course regular investment does not guarantee a profit
nor does it completely shield you against a loss in a declining market.
If you are interested in increasing your wealth, take advantage of the power of compounding
by reinvesting your distributions. As Einstein once said "the most amazing mathematical
phenomenon is the magic of compounding interests".
The recent market volatility should serve as a good lesson for many who used to bet
heavily hoping to reap huge rewards from the market. Do not only focus on making
money. Learning how not to lose money is more important. Find the causes behind the
losses. Losses are inevitable in any investment or business. Although hard to do,
some professionals would agree that one must learn how to take losses - not letting
the losses get out of hand.
You cannot be right all the time and you have to admit your mistakes. Investors,
equipped with all sorts of analysis and forecasts still lose money - there is no
single method which guarantees only profits. Many of the world's successful traders
have gone bust at least once in their careers.
Making rational investment decisions during market turbulence is difficult even for
professionals. It takes years of experience in order to be able to weather stormy
periods. Investors with sound financial plans should be able to better protect themselves
against the financial storm effectively.
Financial markets are governed by various considerations. In the more developed markets,
individuals invest on fundamentals. They look at individual companiesí expected earnings.
They look at the price earnings ratios plus other indicators and react to higher
interest rates and other relevant economic-related items.
This is not the case for the individuals who tend to persistently bet on rumors.
These people mainly driven by emotions tend to lose more over the long-term compared
to other types of investors. They are affected by irrational human beings.
Lastly, be fundamental-driven and think long-term when investing it will save you
alot of heartache in the long run.
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