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How Dollar Cost Averaging Works
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Say you have $100 and you buy a stock that costs $10 per share. That means you buy 10 shares. Next month, you save another $100, which you place into the same fund, only now the shares are just $5. Thus, you buy 20 shares. What’s the average price of all your shares?

If you said $7.50, you’re wrong.

You invested $200 ($100 per month over two months) and you own 30 shares (you bought 10 shares, then 20). Divide $200 by 30 shares and you’ll find that the answer is $6.67.

Why did you think the answer was $7.50?

Because you used the arithmetic mean ($10 + $5 divided by 2 = $7.50). But I used the harmonic mean ($200 divided by 30). Thus, we’re both right — the average price is $7.50, but the average cost is $6.67. Since the harmonic mean always produces a lower number than the arithmetic mean, you have a built-in profit!

Dollar cost averaging succeeds because you buy fewer shares at higher prices and relatively more shares at lower prices. To make it work for you, simply invest a specific amount of money at a specific interval. Perhaps $100 per month, $25 per quarter or a $3,000 IRA each year. It does not matter as long as you are consistent. Be sure to invest at each interval, regardless of what the stock market is doing at the moment.

In fact, dollar cost averaging helps you overcome your fear that you’ll invest at the top of the market. If you had invested $1,000 in the S&P 500 on January 1 of every year from 1965 through 2002, you’d have earned an average annual return of 10.2%. But if you got really lucky and were able to make your investments on the one day each year when prices were at their lowest, you’d have averaged 10.9% instead. But, knowing your luck, it’s more likely that you’d have picked the worst day to invest each year. If so, your average annual return would have been 9.8%.

As you can see, it doesn’t much matter when you invest when you dollar cost average. It only matters that you do invest and that you stay invested. "Timing" doesn’t matter — "time in" does.*

~excerpt from the Truth About Money by Ric Edelman

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Dr. Jeremy Siegel, a professor of finance at The Wharton School of the University of Pennsylvania and author of Stocks for the Long Run, has done a thorough historical study of the returns of different types of assets over the past couple hundred years.

What he discovered is dramatic:

• $1 invested in gold in 1802 would have been worth $32.84 at the end of 2006.

• The same dollar invested in T-Bills, with interest reinvested, would have grown to $5,061.

• $1 invested in bonds would be worth $18,235.

• And $1 invested in common stocks with dividends reinvested – drum roll, please – is now worth more than $12.7 million.

Read more here

As our market is going through uncertainties both in politic and economic itself, people are flocking to investments that are able to hedge such uncertainties. Many opt for bonds that offer security but less-than-inflation rate of growth. However, there is one vehicle of investments that strive in the time of political and economic struggle. It’s gold.

Before you jump straight into this golden arena, there are few things that you have to know. This guide will ensures that you will be better prepared in Q&A session with your investment advisor.

Question. What kind of gold should I buy?

Answer. Gold comes in many forms. So you have to know which suits you best. First we have bullions or gold coins. In Malaysia, the only bullion coins is Kijang Emas. It’s available through local banks. You can get more info from Maybank page.

If you are not keen to keep the coins by yourself, you can save the hassle by opening gold investment account, like the one offered by Public Bank. This gives peace of mind and reduces unnecessary risk of keeping the real gold in your house.

Q. When should I buy?

A. If you read online articles, they will tell you that it’s always the best time to buy gold. Most probably because those people the ones selling gold. However, it’s quite true but I won’t give you that straight answer. Gold is a limited expensive metal, is not a derivation, have resilient value and rather high liquidity. Besides, the value of gold usually strives when inflation rate increases, currency is having debasement or future economic prospect is in gloom. All of these put gold as a preferred investment when other investment vehicle fail to offer enough confidence to investors.

Q. How much should I buy?

If you would like to have gold as part of your investment, it’s best to consider it as a low risk low return investment. Having said that, I would say 10-30% is a good range when economic is having a good time and you can increase it if you are expecting economic slowdown. That’s it if you are a speculative investors, if not, just do regular investment on gold and you should be fine.

Q. How about gold stock?

A. Gold stock are shares of companies that deal with gold mining, extraction, processing and minting. While it’s closely related to gold, it’s still stock, not precious metal. If the stock rides on the bull market because of gold, you are lucky but it doesn’t offer the same qualities that people seek by investing in gold. So make sure you know what you are doing.

Q. Where can I track daily gold price?

A. Kitco has a good graph of daily gold price movement on their site. Check it out.

Q. Ok, I’m interested, what should I do now?

A. If you are ready to make gold investment, go to nearby bank and ask them about it. You’ll learn a lot more when you already have basic of gold investment.

Good investing

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[reading 1, 2, 3]

Seriously, can I do that?

Not legally as you have to get license and whatnots but on personal scale, it’s as easy as buying stocks.

I know you are joking but why would I do that?

The biggest advantage of buying your own fund is that you can evade the enormous 6.5% initial fee and 1.5% annual management fee. Let’s see how the fees eat up your profit.

The diagram uses 6.00% initial fee and 1.5% annual fee. At the end of the 5-th year, you almost lose 33% of your profit to the fees. Scary huh?

Scary indeed. What do you mean mirrorring?

Most of mutual fund hold shares of certain group of blue chip companies which are expensive, relatively stable and collectively have high impact on index fund. That’s why we could see high correlation between composite index performance and mutual fund performance.

High portion of mutual fund are those of blue chip shares. So it’s easy for us to replicate mutual fund performance by buying the same shares. Furthermore, it’s clearly indicate the percentage of shares bought in the prospectus or annual report.

Any disadvantage?

Mutual fund managers are backed by elite group of analysists. They know better when to buy and sell. However, as blue chips are expensive and more stable, buying/selling decision are seldom made. So there are less things to worry about.

Blue chips price are also expensive. With the same amount of money, you’ll get less shares than other cheaper shares.

You also need trading license to buy and sell. So it needs a little more stuff to do before you could start trading.

Final words

Here I just give a general approach. You might want do more research on your own. Start slow, get experience and don’t do what panic people do.

Good investing.

What is Subprime Mortgage?

Basically it’s a mortgage for people with shaky credit, or specifically, people who is unlikely to be able to pay the mortgage. Usually it’s given to those who are seeking money to finance their houses.

Why banks (lenders) give money to those who can’t pay?

If banks are doing something, they are doing it for money. Dealing with subprime mortgage is a big risk but the interests rate for it is also high. Usually subprime borrowers will have to pay lesser interests rate for the first year and the rate climbs up for the later years. This is the time when borrowers start to have problem paying their monthly payment.

If borrowers can’t pay, won’t the banks loss their money?

Before it became a crisis, subprime was not all that bad. Banks were very vigilant in determining which people can pay or can’t pay even if they have bad credit, and the banks are very good at it(it’s their job after all). However, once real estate market was skyrocketing (just one of many reasons), a lot of people were buying and selling houses. And thus the demand for mortgage rose especially subprime mortgage (poor people want to earn extra money). Banks were getting greedier too. They thought that, even those people can’t pay once the interests rate is up, they can just sell the house with higher price and settle the mortgage. With that situation, banks became less worry about their borrowers and race against other banks to create more mortgage.

Anther important reason is that banks can sell such security (subprime mortgage) with other names that doesn’t relate to subprime at all. This is called ’repackaging’. Once it’s repacked, other people from the world can buy that security. Even the high risk is distributed in that package, the security buyers actually didn’t care because they actually earned a lot from it, at that time.

When it started to become a crisis?

I don’t know which happened first, the subprime crisis or the slowdown of real estate market. But once houses’ price started to decline, the subprime borrowers found themselves in trouble. Most of them eventually found themselves in trouble before, but now, their usual escape door – higher house price – has vanished. People started to panic and try to dump their mortgage to other people. Banks which now realize the effect of this, try to cover their loss by increasing the rate even more, forcing people who are under these mortgage to pay more and at last defaulted by the failure to pay the monthly payment.

If it’s mostly related to real estate, why the effect is so catastrophic?

We have to remember that house is the biggest investment in our life. If you have to pay more for it, you can’t buy more for clothing, food, and other necessities. This in turn, affect the retail market and other vital consumer-economic section.

There are more reasons and detail to this crisis. I explains this crisis in great simplicity and with my limited understanding and readings. Please correct me if there is any misinformation in it.For more information you can always visit wikipedia and search on google news.

Thanks to Al-Hafiz for asking.

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Here we come again to the point of making decision. Are you going to cut loss and retreat from stock market/sell your mutual funds? Or you just take it as one of the dismissible volatility and stick to you buy and hold strategy? Whatever you choice , just don’t panic.

Here is 17th August chart for Ittikal fund. As you can see, the value is having a rollercoaster drop. Other funds are having the same kind of drop too.

My next move is to hold the fund. I’m expecting these mutual funds to have the same kind of recovery like the middle section of the graph. Whether that will occur or not, I’m not really care. Currently, I’m waiting for the price to hit the bottom and start to come up. When that happens, I’m going to buy more fund. I’m thinking to buy PIOF as the fund constantly outperform it’s indices.

What’s more, I think that last Friday’s price is the bottom for our market. US stock market also have shown improvement as Fed has cut the interest rate to reduce volatility of its stock market. I’m being a little bit speculative right now but it’s alright I guess.

What do you think about my move? And what have you done or will do after this? Would love to hear from fellow readers.

update: Mr KKChow has a better graphic for this

Azwa has posted a question to ask about how Dollar Cost Averaging works. Here two simulation of the averaging effect of regular investment. Basically, the concept of dollar cost averaging is the system buy more units when the price is low and less unit when the price is high.

In High-low-high Market, you started investing at $1.25 and ended at $1.25 too. But with dollar averaging cost effect, you actually have gained 8 cents.

In bearish market, your investing started at $1.25 and ended up at $1.05. Instead of losing 20 cents, you just lost 7 cents, thanks to dollar cost averaging. Looking positively, you just need that fund to increase 7 cents only to break even. If it can go down 20 cents, going up 7 cents might be even easier.

The tables above is just for dramatization only. Dollar cost averaging can bring both profit and loss but one thing that is sure is that it reduces the effect of fast moving market and thus reducing your risk.

By studying cash flows (tracking the movement of money into and out of mutual funds), 2 financial research institutions, Dalbar and Morningstar, found that the vast majority of people buy investments when prices are high, and they sell when prices are low.

For example, consider the returns of a fund that (according to Morningstar) averaged 15% per year for the ten years ending December 31, 2006. Morningstar says the average investor of that fund earned only 2.6% per year. In another fund that posted an 8% annual return, investors earned only 0.6%. A third, which posted a 7% average return, has an average investor return of -15%.

There’s such a large discrepancy between investment returns and investor returns because investors tend to buy funds only after they’ve risen in value. Funds attract media attention only after they do well, and fund companies place ads in magazines and newspapers only after the funds produce a great record they can tout. Investors agree that the results are terrific, and they assume that a fund that made lots of money in the past will continue to do well; so they buy. When those profits fail to materialize, they sell. Then they scratch their heads and ask, “How come I’m not making money with my investments?”

The solution: Buy and hold for years and years.

[via Ric Edelman]

Are You Eligible?

You are eligible if:
a) Your balance in Account 1 is not less than RM55,000
b) You are below 55 years old
c) You have not withdrawn from your Account 1 in the last three (3) months from the date of your last transaction.
d) The minimum eligible amount is RM1,000.00 and the maximum amount is 20% of the savings amount that exceed RM50,000.00 in Account 1.

Example:

If you are eligible, take this opportunity to have better yield with your EPF saving. See your nearest agent today.

Whoa.. what a boring topic. However this might be the answer for ‘undisciplined’ people to invest. In my posts about ASB, there are a lot of people saying that they make a loan to discipline themselves to invest. Well you don’t have to take a loan for such thing. Make a Standing Instruction(SI) instead. SI is just like an automatic bill payment but instead of paying bill, it puts your money into your investment every month, automatically.

SI works best with unit trust. It allows you to take advantage of dollar-cost-averaging concept by investing both in bear and bull market. If you are not into investment, have it deposit into you saving account, or bonds.

The best part of SI is that you won’t realize that you are saving money. For new investors, I know it’s not a great feeling to put aside some of your income every month if you do it manually. You feel that your monthly paycheck is not even enough for you and your family, let alone for investing.

Sooner or later, you will get used to your currently reduced paycheck and you are saving money at the same time! And you will thanks yourself when you realize that you have tens of thousand Ringgit in your account when you need it the most.

What are you waiting for? Contact your banker/unit trust agent/broker to start an SI for you and start saving now!