Dollar Cost Averaging a Better Strategy ?

What is Dollar Cost Averaging ?

Strategy in which you invest in a fixed amount of money at a regular basis/ intervals regardless of the market price of an investment .

The Question is , Not Why but HOW can this strategy BENEFITS you and me as a whole?

Lets take an example here, Let's assume we have two different investors here. One with a lump sum investment and one with a monthly investment of $100 per month for 6 months. 

                                         Investor A                         

                        Price $                          No. of
                                                            Units /
                                                            Shares

Month 1           5              $600               120                                
Month 2           5                                      
Month 3           2                                      
Month 4           4                                         

Month 5           3                                    
Month 6           5                                        

What we can see here is that , investor A invested $600 with the no of units / shares of 120 at the price or $5

                                      Investor B                         

                        Price $                         No. of
                                                           Units
                                                           / Shares

Month 1           5                  $100          20                              
Month 2           5                  $100          20                                    
Month 3           2                  $100          50                     

Month 4           4                  $100          25                   

Month 5           3                  $100          33.33                    

Month 6           5                  $100          20                       

               3.56¹ $600   168.33²

¹[( $5 + $5+$2+$4+$3+$2) divided by 6 months.]

²[ (20+20+50+25+33.33+20) divided by 6 months ]

If you can see , there's two differences in using the Dollar Cost Averaging :

1. The price are lower / cost are lower  , instead of $5 is now $3.56 

2. The no of units / shares are higher , instead of 120 is 168.33.

There by using Dollar Cost Averaging its helps us as an investor to create a better opportunity increasing profits and minimizing cost in a longer run. 

Besides  it also helps us to take advantage of the market as we can never time the market. By investing in this strategy we are always in the market whether the market is up or down and hence , we are taking the opportunity each time the market reacts. We all know the beauty of buy low but the fact is how low is low ?

Dollar Cost Averaging also promotes force savings where it creates a good habit for us to set aside our income for investment to add value in our future so that we can achieve our financial goals at a given time frame.

By doing Dollar Cost Averaging , we are less burden in our finances as we could put a comfortable level on our monthly savings / investments instead of a huge amount of lump sum to be saved / invested at a given time. This means , we could save / invest to achieve our financial goals at the same time we do not need to compensate on our lifestyle. That/s a pretty good news for you and me. 

Last but not least,  however this strategy is best to be used for a longer term of investment objectives.

If you have any questions on Dollar Cost Averaging or any other questions on financial goals planning / investment options do not hesitate to leave a comment 

  charissim.ristyle@gmail.com

Understanding Distribution of Income

As investors it is important that we are aware of the meaning of distribution of income in our own investment.




Equity Funds

The realized income comprises capital gains and dividend income. Capital gains are generated when the fund sells its investments that have appreciated in value while dividend income is earned from the fund's holdings of companies' shares.

                                                        DEPENDS:-

• market uptrend      /       market downtrend     
• stronger corporate earnings       /    weaker corporate earnings
• higher capital gains & dividends       /     lower capital gains & dividends
• higher distribution of income     /   lower distribution of income

When the market is in a favorable market condition the capital gains will increase and when the market is in a challenging market conditions the dividend income will decline. Therefore , there is a positive relationship between the market conditions with capital gains and dividend income.

Fixed Income / Bonds

Income distribution derived from :-

1. coupon income from bonds
2. capital gains from selling bonds
3. interest income from deposits

Generally , fixed income / bonds funds pays distributions to unit holders on a fixed schedule ( semi annually / annually) due to the bond issuers are usually government entities and corporations that are obligated to pay interest / coupons at a fixed intervals. Hence, the risk are lower as compared to equities.

However , investors should also know that bond prices and interest movements are in a negative relationship which means , if at any point of time the interest increases, the bond price will fall which also means that there's an impact to the capital gains generated. Conversely , when interest rates decline , bond prices appreciates and the funds are more able to generate higher quantum of capital gains.

Hence in both equities and bonds funds , investors are advised to stay in the medium to long term in order to ride out the short term volatility in both funds as well as taking the advance of the compounding interest.  Click here for compounding interest understanding

I hope that now you have a better understanding on the distributions and its always good to invest based on your financial goals and for a better portfolio management to have both funds in a certain percentage  range from 70:30 , 60:40 , 50:50 based on your own risk profile classifications.

Compounding Interest

There is investor of mine once asked me , "Charis , what is this term compounding interest ? ", "How does it benefits me ?". So then , hence today my topic will be Compound Interest. 

What is Compound Interest? 

Basically compound interest is your initial principal + accumulated interest over the periods.

In other words it is  basically interest on interest.

So like I mentioned earlier on the questions my investor asked, I replied that when you opt for reinvestment you are already benefiting the value of compounding interest. I will show you the reason behind below :-

Let say you invested RM10,000 with the rate of return of 5% on a compounding interest basis. 

Year 1 :  RM 10,000 * 5% =  RM 500     = RM 10,500

Year 2 :  RM 10,500 * 5% = RM 525      =RM 11,025

Year 3 :   RM 11,025 *5% = RM 551.25 =RM 11,576.25  

Therefore the total interest received  = RM 1576.25
( RM 500 + RM 525 + RM 551.25)

As compare to simple interest / without compound interest :-

Year 1 : RM 10,000 * 5% = RM 500 = RM 10,500

Year 2 : RM 10,000 * 5% = RM 500 = RM 10,500

Year 3 : RM 10,000 * 5% = RM 500 = RM 10,500

Total interest received = RM 1500

As you can see , obviously with compounding interest it is more worth while if you understand the basis of Time Value of Money, which simply means that money available today is worth more than the future unless money itself an generate interest themselves. Hence, we are need to invest our money in different platform in order to make our money value more value in near future. 

Therefore, the higher the number of compound periods the greater the compound interest value. Compounding interest also aids in boosting up the investment value over the long term periods.

PM me for more info on how to have a better returns for your financial goals. 

charissim.ristyle@gmail.com