Scenario 1: Mr. J did invest single lump sum RM31,000 into an UT on 13-Dec-07. Today's value of this UT suffers loss of 9.81% for holding period (13-Dec-07 till 4-Jun-10), which its value is RM26,421.16, CAGR = -6.27% p.a.
Scenario 2: Mr. K started his first investment for the same UT for RM1,000 on 13-Dec-07. And, he practiced his monthly investment amounted RM1,000 into the UT on the 1st day of the month till 1-Jun-10. Today's value of this UT generates gain of 3.82% for holding period (13-Dec-07 till 4-Jun-10), which its value is RM32,183.39, CAGR = 3.03% p.a.
Rule: practicing in dollar cost averaging only be effective on the best quality share/UT.Discussion:
No body can time the market. So, dollar cost average works perfectly during the price going down because it buys more during downtime. Thus, cultivate the discipline of averaging the share/unit that u bought. It is proven a power statistical way to average the risk of buying high or selling low. The best example, I will quote EPF. Discipline, force saving, only invest no withdraw and well-managed fund are the characteristic of an effective saving. Doubtful? Then you many compare your saving by your own effort with saving by EPF. The EPF's results tell you the result.
In reality, people are hard to be educated to have the awareness of the dollar cost averaging. They only buy it during price is on the way up and sell it during price in on the way down. It is mainly because of the lack of education in investment.
To make it effective, cutting cost for the transaction is very important for the investment. You may buy share (due to very minimal cost to have the transaction done), UT (with agent's price or staff price) or buy it directly from FundSuperMart (cheaper service charge). Most importantly, Malaysia doesnt impose capital gain tax on the share capital appreciation, but income tax on dividend and distribution from share/UT. Let us study scenario 3.
Scenario 3: Miss L is an agent who attaches to one of the UTC. She pays (1-5.5%+2.75%=97.25% simplified) for each buying transaction. Today's value of this UT generates gain of 6.84% for holding period (13-Dec-07 till 4-Jun-10), which its value is RM32,183.39, CAGR = 5.38% p.a.
If I got time, next day we discuss VCA - value cost averaging.
1 comment:
Tire to talk about this general mistake by so-called investor. Buy-and-hold strategy coupled with dollar-cost-averaging strategy is the best way to invest in quality asset. The best example for this scenario is servicing the property by received monthly rental.
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