Friends who know I have investment in stock market asked if I am affected by the recent market volatility. Personally, I invest quite a lot of my savings in stocks and unit trust, about half of my investment is suffering from paper loss at the moment (Paper loss means unrealized loss, as long as I do not "sell" the stocks and unit trust, it is like a loss recorded on "paper"). However, I do have a few good blue chip stocks which the share prices are very stable and able to withstand the recent storms and rains in stock markets worldwide.
No one can tell the exact top or bottom point of stock markets, therefore let's not try to be the fortune teller but adopt a smart strategy - Dollar Cost Averaging.
Dollar Cost Averaging is a strategy to invest at an interval (usually fixed) with a fixed amount of money (some people will fix the units of unit trust or number of shares of a stock to buy in). This strategy allow you to buy in no matter the market is at its high or low. Eventually you will be able to achieve the "averaging" effect.
Let's see a simple example (without complex fee calculation or things like that):
In January, You invested $1000 in Unit Trust A at the price of $0.50 per unit, therefore you have 2000 units. You have setup a Standing Instruction to invest $100 every month in the same Unit Trust A, despite the price.
| Amount invested | Price | Units | |
| January | $1,000 | $0.50 | 2000 |
| February | $100 | $0.47 | 212.77 |
| March | $100 | $0.45 | 222.22 |
| April | $100 | $0.46 | 217.39 |
| May | $100 | $0.51 | 196.08 |
| June | $100 | $0.55 | 181.82 |
As you can see, when the price is low, we purchase more units; when the price is high, we purchase less units. This will answer the questions below:
#1 I afraid I will buy at the wrong time - highest price?
#2 I am not sure if this is the right time to buy -lowest price?
Last but not least, Dollar Cost Averaging strategy can also help you to set aside some money for savings/investment at a regular or fixed frequency.
This strategy has helped me a lot, not only successfully "forced" myself to save some money every month but also help me to achieve a better return from my investment (Unit Trust in particular) in long run. A friend of mine bought similar Unit Trust as me, but he did not practice Dollar Cost Averaging strategy, that is why his "paper loss" is greater than me (at the moment).
2 comments:
I will want to start the forced saving soon, Anson! Once i am settled with my baby of the year...u know which baby is that ...cheers!!
"Forced Savings" is definitely good but you can still set aside some money for savings at anytime you want! Just don't stop doing something for yourself, for your future!
I understand the "baby" is quite big, so you definitely need some time to settle it :)
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