Dramatization : Dollar Cost Averaging


(Tables were accidentally deleted, I’ll try to remake them soon)

update: Mr KKChow has a better graphic for this

Azwa has posted a question to ask about how Dollar Cost Averaging works. Here two simulation of the averaging effect of regular investment. Basically, the concept of dollar cost averaging is the system buy more units when the price is low and less unit when the price is high.

In High-low-high Market, you started investing at $1.25 and ended at $1.25 too. But with dollar averaging cost effect, you actually have gained 8 cents.

In bearish market, your investing started at $1.25 and ended up at $1.05. Instead of losing 20 cents, you just lost 7 cents, thanks to dollar cost averaging. Looking positively, you just need that fund to increase 7 cents only to break even. If it can go down 20 cents, going up 7 cents might be even easier.

The tables above is just for dramatization only. Dollar cost averaging can bring both profit and loss but one thing that is sure is that it reduces the effect of fast moving market and thus reducing your risk.

  1. #1 by norisa on July 30, 2007 - 10:45 am

    Dear Irwan,

    Maybe you can come out with a calculator(like ASB) how to calculate dollar cost averaging. For example I have invested in PIADF (Public Islamic Asia Dividend Fund when it first launch at 25 cents per unit, now reached 0.2567 (of course there were ups and downs since it was launched on 3 Apr 2007). Total returns from 3 Apr – 26 July 2007 =9.37%
    So how could I calculate my profit since I have invested RM2,000 (during the launching period where I got 80 free units so total units 8080 units) then starting 8 june I start my S.I. every month RM500.

    Hope can help me out..

  2. #2 by Irwan on July 30, 2007 - 2:41 pm

    unlike asb, the net asset value of trust fund changes everyday. so it’s impossible to track the price without the price data. If you want to know how much profit you have generated, you can use free tool at http://pelaburan.net/

  3. #3 by kkchow23 on July 30, 2007 - 3:04 pm

    hi norisa,

    It’s not that simple to calculate if it’s using Dollar-Cost Averaging. This is because every time we purchase additional investment, the price fluctuate and we’ve to take notice each pricing. I would suggest the best way to know how’s your progress of your investment is by contacting your agent. He/she should be responsible to provide information whenever needed. If not you can try customer service or switch agent.

    I’ll try provide an example calculation;
    http://financialfreedomunittrust.wordpress.com/2007/07/30/dollar-cost-averaging-principle/#comment-78

    Hopefully the calculation is correct. I’m sorry if there’s any error occur during the process.

  4. #4 by kkchow23 on July 30, 2007 - 3:44 pm

    If you were to invest lump sum, the estimate return will be slightly more due to the market uptrend. But we must always consider this; Do we have that amount of money during that time? Do we know what will happen in the future? What if the market goes downtrend instead?

    Your investment will be something similar to this:
    http://financial-freedom-unit-trust.blogspot.com/2007/07/dollar-cost-averaging-principle.html

  5. #5 by TUN PERAK on March 5, 2008 - 10:31 pm

    Forgive my ignorance, but as I understand it, it is generally accepted that, dollar cost averaging does not work well in extended bear market(of which we may be at the beginning of) unless one have at least double the time horizon after the expected rebound.

  6. #6 by TUN PERAK on March 6, 2008 - 5:38 pm

    Sorry, What I meant to say was, extended bear market with high volatility.

  7. #7 by skeper on March 14, 2008 - 5:49 pm

    Tun, appreciate if you can enlighten me on that.
    Agents always say thru dollar-cost averaging, you will win in the long term. Is there anything wrong with the statement?

  8. #8 by Will Costantini on November 9, 2010 - 2:06 am

    Great weblog you latch on to

  9. #9 by sweaty palms on November 13, 2010 - 7:13 am

    Is it alright to put some of this on my blog if I include a link to this site?

  10. #10 by Iona Afoa on November 13, 2010 - 6:42 pm

    Man, that is hard.

Comments are closed.