Dollar Cost Averaging
This is a concept used in investing, more eminent in insurance where policyholders do a regular monthly investment plan. Dollar Cost Averaging (DCA) is useful when the price of asset (or apples, if you like) fluctuate and when you are not sure of future prices.
An example of the above two conditions is the stock market. Over the long term, prices should be on the uptrend, the same way you pay for the same fishball noodles, but prices are subject to "noise", which means it will shift up and down of the fair value in the short term. For example, the fair value of apples is $1, then suddenly an apple hits Isaac Newton's head, and it goes for $2 the moment after. Or there is news saying that in actual fact it's a mangosteen a day that keeps the doctor away, resulting in apples selling for $0.50. So that is the lousy example I came up with.
Now back to serious business.
Take a look at the chart. Assuming you are an investor and the time now is 2004. The right side of the chart is blank. You decide to split your investment into five years from 04 to 08. And you retire in 09. The prices at the beginning of the years are $1.10, $1.20, $1.60, $2 and $2.60 respectively. The average cost works out to $1.70. Unfortunately nobody retired willingly in 2009 cos the price plunged to $1.60 and you made a loss of $0.10 in your investment.
But you happened to know another investor who made one lump sum investment into the same fund in 2007, when the price was $2. He also wanted to retire in 2009. But he played a wrong game of showhand and he had to work harder than you now cos he didn't know the concept of DCA.
Note: The chart shown is taken from Great Eastern's official website, and the fund is Enhancer, one of the best performing funds of all time. Morningstar rates it 5 stars. The 5-year compounded return is 12.47%, which means that a $10,000 investment would have grown to $17,989. More info here.
This is a concept used in investing, more eminent in insurance where policyholders do a regular monthly investment plan. Dollar Cost Averaging (DCA) is useful when the price of asset (or apples, if you like) fluctuate and when you are not sure of future prices.
An example of the above two conditions is the stock market. Over the long term, prices should be on the uptrend, the same way you pay for the same fishball noodles, but prices are subject to "noise", which means it will shift up and down of the fair value in the short term. For example, the fair value of apples is $1, then suddenly an apple hits Isaac Newton's head, and it goes for $2 the moment after. Or there is news saying that in actual fact it's a mangosteen a day that keeps the doctor away, resulting in apples selling for $0.50. So that is the lousy example I came up with.
Now back to serious business.
Take a look at the chart. Assuming you are an investor and the time now is 2004. The right side of the chart is blank. You decide to split your investment into five years from 04 to 08. And you retire in 09. The prices at the beginning of the years are $1.10, $1.20, $1.60, $2 and $2.60 respectively. The average cost works out to $1.70. Unfortunately nobody retired willingly in 2009 cos the price plunged to $1.60 and you made a loss of $0.10 in your investment.
But you happened to know another investor who made one lump sum investment into the same fund in 2007, when the price was $2. He also wanted to retire in 2009. But he played a wrong game of showhand and he had to work harder than you now cos he didn't know the concept of DCA.
Note: The chart shown is taken from Great Eastern's official website, and the fund is Enhancer, one of the best performing funds of all time. Morningstar rates it 5 stars. The 5-year compounded return is 12.47%, which means that a $10,000 investment would have grown to $17,989. More info here.
I am an authorised agent qualified to give advice on funds specialising from bonds to sector-specialised equity. If you are interested to start a monthly investment plan, leave me a message but I can't guarantee that I have time. Just kidding.
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