Investment Ideas:
Dollar Cost Averaging
Dollar cost averaging (DCA) is a technique designed to reduce market risk through the systematic purchase of securities or funds at predetermined intervals and set amounts. Instead of investing all your money in one lump sum, you can invest small amounts over a longer period of time. This spreads the cost basis out over several months/years, providing insulation against changes in market price.
Getting Started
In order to begin a dollar cost averaging plan, you must do three things:
Decide exactly how much money you can invest each month. Make sure that you are financially capable of keeping the amount consistent; otherwise the plan will not be effective.
Select an investment (index funds are particularly appropriate due to their diversified portfolio holdings) that you want to hold for the long term, preferably 5 to 10 years or longer.
At regular intervals (weekly, monthly or quarterly works best), invest that money into the fund you have chosen. If possible, set up an automatic withdraw plan so the process becomes automated.
An Example of a DCA Plan
You have Baht 120,000 you want to invest on January 1 st . You have two options:
You can invest the money as a lump sum in one go or
You can set up a DCA plan by investing Baht 10,000 per month for 1 year.
Had you invested your Baht 120,000 in January, you would have purchased 12,000 units at Baht 10 each. Let's suppose that the unit price of the fund fell to Baht 5/unit in June and you panic and sold all of your investment, you would have lost 50% of your principal. And let's suppose again that the unit price climbed back to Baht 10 in December and you held on, your return on investment would have been zero.
However, had you dollar cost averaged into the fund by investing Baht 10,000 each month, you would own 15,933 units at the December closing price of Baht 10/unit, giving you a market value of Baht 159,331 or 33% return on your Baht 120,000 investment. Although, in certain months (between February through July ) you may be in the red but due to averaging component of a DCA plan, you are likely to regain the losses much quicker than a lump sum method.
|
|
Baht 120,000 |
|
Baht 120,000 |
|
Inv Amount |
|
|
NAV |
Lump Sum |
Return % |
DCA |
# of Units |
(Baht) |
Return % |
Jan |
10.00 |
120,000 |
- |
10,000 |
1,000 |
10,000 |
0 |
Feb |
9.00 |
108,000 |
(10.00) |
10,000 |
2,111 |
19,000 |
(5) |
Mar |
8.00 |
96,000 |
(20.00) |
10,000 |
3,361 |
26,889 |
(10) |
Apr |
7.00 |
84,000 |
(30.00) |
10,000 |
4,790 |
33,528 |
(16) |
May |
6.00 |
72,000 |
(40.00) |
10,000 |
6,456 |
38,738 |
(23) |
Jun |
5.00 |
60,000 |
(50.00) |
10,000 |
8,456 |
42,282 |
(30) |
Jul |
6.00 |
72,000 |
(40.00) |
10,000 |
10,123 |
60,738 |
(13) |
Aug |
7.00 |
84,000 |
(30.00) |
10,000 |
11,552 |
80,861 |
1 |
Sep |
8.00 |
96,000 |
(20.00) |
10,000 |
12,802 |
102,413 |
14 |
Oct |
9.00 |
108,000 |
(10.00) |
10,000 |
13,913 |
125,214 |
25 |
Nov |
9.80 |
117,600 |
(2.00) |
10,000 |
14,933 |
146,344 |
33 |
Dec |
10.00 |
120,000 |
- |
10,000 |
15,933 |
159,331 |
33 |
|
|
|
|
120,000 |
|
|
|
Killing Two Birds With One Stone: Combining the power of DCA with the Diversification of an index mutual fund.
Index funds are passively managed mutual funds that are designed to mimic the returns of benchmarks such as the SET-50 Index or the SET Index. This instant diversification of an index fund comes with the added bonus of lower management fees than their actively managed counterparts, which can add up to several thousands Baht over the course of a decade.
The DCA component reduces market risk , while the index fund investment reduces company-specific risk . This combination can be among the best investment options for individuals looking to build up their long-term wealth. Now you can kill two birds with one stone by investing in Finansa SET-50 LTF and by setting up a DCA plan, you may be a lucky winner in the SET's special promotion “Let's Activate Your LTF”.