Sunday, July 27, 2008

Dollar Cost Average

Sharing a thought...

What is Dollar Cost Average (DCA)?

It's a benefit whereby investors who do regular fix amount of investment will enjoy. Very suitable in a market that is uncertain/volatile. The key word is regular investment and fix amount.

Let's say an investor invests $1,000-00 regularly in today's equity market scenario, whereby the price is going downhill (assuming no service charge incur).

To read the data below, pls follow its header's colour with the data below (sorry, cud not prepare a proper table in this page, so has to be creative here) ;)

Mkt Prc Units Ttl Units Total DCA Investment
Sen/unit Bought Collected Cost (Total Cost/Total Units)
------------ ----------------- ------- --------- -----------
0.25 4,000 4,000 1,000 0.25 $,1000-00
0.22 4,545 8,545 2,000 0.234 $1,999.53
0.21 4,761 13,306 3,000 0.225 $2,993.85
0.19 5,263 18,569 4,000 0.215 $3,992.34
0.20 5,000 23,569 5,000 0.212 $4,996.63
0.17 5,882 29,451 6,000 0.204 $6,008.00 (began to make profit)
0.18 5,556 35,007 7,000 0.200 $7,001.40
0.16 6,250 41,257 8,000 0.194 $8,003.86
0.17 5,882 47,139 9,000 0.191 $9,003.55
0.18 5,556 52,695 10,000 0.190 $10,012.05
0.20 5,000 57,695 11,000 0.191 $11,019.75
0.21 4,761 62,457 12,000 0.192 $11,991.74
0.23 4,348 66,805 13,000 0.195 $13,026.98
0.25 4,000 70,805 14,000 0.198 $14,019.39
0.26 3,846 74,651 15,000 0.201 $15,004.85

It's an investor's objective to BUY LOW and SELL HIGH (that's how profits are being made). In mutual fund, another objective an investor has is to ACCUMMULATE UNITS.

Dollar Cost Average is Total Cost divide with Total Units. It represents the ACTUAL COST of each unit on average basis of what the investor have on hand (total units).

Look at the first purchase of $1,000 at 25sen, total units was 4,000. Therefore cost of each unit is 25sen.

As the price goes down (25sen to 22sen), with the same investment amount ($1,000), the number of units the investor is able to buy increases (extra 545 units). Take note of the DCA value which also reduces (25sen to 234sen). This is made possible as the cost of each unit at the current low price (22sen) helps to reduce the cost of other units on hand (4,000 units originally at 25sen/unit ) thru additional units.

For an investor who decides to practice one time off investment ie to invest $1,000-00 only at 25sen, the investor would have to depend on the fund's price to increase above 25sen in order to make any profit or, to wait for any distribution/dividen to be declared in order to increase the number of units owned. It may take awhile in the current market condition. Furthermore, the dividen earned may not be significant as the principal is low ($1,000 only or 4,000 units). "Not enough power leh!"

By practising regular investment, investor is making sure his money works hard for him as he amass greater number of units at lower cost thus enable him to make profit faster and greater once the market improves as shown in green.

Investor is able to breakeven at 17sen compared to those who invest as a one time off at 25sen. Making profit even when the market price is low?! Yup! Makes sense to invest regularly right? Imagine when "free" additional units are given during distribution or as dividen. The DCA would be lowered further as no additinal cost incurred for the extra units! That is your bonus! Up goes your profit! :)

Invest for the future especially for your retirement as during our golden years our income stops but we still incur expenses in terms of food, lodging, holiday, higher medical cost, etc.

In addition, with the current equity market which is so.......... cheap and with higher......... inflation rate; this method of investment is one of the best way to ensure that our hard earned money's value is being protected otherwise inflation is quietly draining our money's purchasing power.........

Did you noticed you have to fork out extra money to get the same item? That is inflation my friend!

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