Irwan’s

Getting rich is not about getting a well paid job, winning lotteries or putting bets on World Cup. What it takes is just a proper way to do it. Most of my knowledge in this post is obtained by reading ‘Ordinary People Extraordinary Wealth’ by the one of the most successful financial advisor, Ric Edelman. Basically , the most important thing to have a wealthy life is by saving. Yes, it is the most important thing for us, the ordinary people who wants extraordinary wealth.

To ilustrate the importance of saving, I quote the book:

A 20-year-old who saves $45 a month at 12% per year(stock market’s average since 1926) will accumulate nearly $1,000,000 after 45 years. And waiting until you’re 21 to begin saving $1.50 per day means you won’t have as much money as the person who staretd at age 20. The differences between them is a whopping $109,170. That’s right: More than 11% of the total accumulation from 45 years of savings is secured in just the first year.

I heard people said “I should start saving 20 years from now” but stop lamenting about the past: It gives you nothing but regret. What is more important is to start saving from now on. As the quote is about, I’m going to say about regular saving not a lump sum saving.

Ok, Im going to save my money, but Where Should I Save?

In the bank? Good guess. But it’s not quite true. It’s maybe the safest place to keep your money but sub 3% interest is hardly able to counter 3-4% inflation each year. I’m suggesting you to invest the money in mutual fund which is also known as unit trust. (please read my disclaimer before you jump straight to do this).

A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities. -Wikipedia

Why mutual fund, not FD, equity or others?

To me, mutual fund is the best for long term regular saving and contain balanced risk and performance ratio. It is not too risky as stock and give better growth than FD. To fully appreciate volatile market we have to understand the Dollar cost averaging theory in wikipedia.

Dollar cost averaging (DCA) is an investing technique intended to reduce exposure to risk associated with making a single large purchase. According to this technique, shares are purchased in a specific amount on a specified periodic basis (often monthly), regardless of current performance. The theory is that this will lead to greater returns, since smaller numbers of shares will be bought when the cost is high, while larger number of shares will be bought while the cost is low. However, research has shown that investing a lump sum according to DCA principles generally results in worse performance as compared to investing the entire sum at one time (Constantinides). -Wikipedia

That’s mean we keep buying the mutual fund regardless of its current performance. This way we will get benefit both on high price and low price:

high price- you get lower number of shares which will have minimal effect when the price go down.

low price- you get higher number of shares which will have big effect when the price go up.

But please remember to practise this theory in below conditions (taken by Ric’s book) :

• You must invest a specific amount of money,
• you must invest this money at a regular interval,
• the money you are investing must be money you have only recently obtained ie. your monthly salary( not from your lump sum)
• you must maintain this system for a long periods of time.

That’s all from me now. To cap it all, in this post I just re-state the importance of saving in accumulate wealth and how well Dollar Cost Averaging theory works in mutual fund plus, in which condition should we practise Dollar CostAveraging. I have not compared between mutual fund and stock equity which I think have their own advantages and drawbacks. If you want to step in the mutual fund investment, please proceed to your local financial advisor as they know what we don’t know about money.