Archive for category Anatomy of Investment

Dollar Cost Averaging, Again

I can’t stress enough how the concept of cost dollar averaging can help you to invest smarter. I found this article from Ric Edelmen’s email that is very motivating and informational. If you only read one article about investing in a year, here’s the one that you should read:

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How Dollar Cost Averaging Works
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Say you have $100 and you buy a stock that costs $10 per share. That means you buy 10 shares. Next month, you save another $100, which you place into the same fund, only now the shares are just $5. Thus, you buy 20 shares. What’s the average price of all your shares?

If you said $7.50, you’re wrong.

 

You invested $200 ($100 per month over two months) and you own 30 shares (you bought 10 shares, then 20). Divide $200 by 30 shares and you’ll find that the answer is $6.67.

Why did you think the answer was $7.50?

Because you used the arithmetic mean ($10 + $5 divided by 2 = $7.50). But I used the harmonic mean ($200 divided by 30). Thus, we’re both right — the average price is $7.50, but the average cost is $6.67. Since the harmonic mean always produces a lower number than the arithmetic mean, you have a built-in profit!

 

Painting-TravellingDollar cost averaging succeeds because you buy fewer shares at higher prices and relatively more shares at lower prices. To make it work for you, simply invest a specific amount of money at a specific interval. Perhaps $100 per month, $25 per quarter or a $3,000 IRA each year. It does not matter as long as you are consistent. Be sure to invest at each interval, regardless of what the stock market is doing at the moment.

 

In fact, dollar cost averaging helps you overcome your fear that you’ll invest at the top of the market. If you had invested $1,000 in the S&P 500 on January 1 of every year from 1965 through 2002, you’d have earned an average annual return of 10.2%. But if you got really lucky and were able to make your investments on the one day each year when prices were at their lowest, you’d have averaged 10.9% instead. But, knowing your luck, it’s more likely that you’d have picked the worst day to invest each year. If so, your average annual return would have been 9.8%.

 

As you can see, it doesn’t much matter when you invest when you dollar cost average. It only matters that you do invest and that you stay invested. "Timing" doesn’t matter — "time in" does.*

~excerpt from the Truth About Money by Ric Edelman

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The best Inflation Hedge?

In the last post, I talked about gold as the investment of choice in bad economy. After reading an article from investmentu.com, my current understanding is not quite true. Here is the excerpt:

Dr. Jeremy Siegel, a professor of finance at The Wharton School of the University of Pennsylvania and author of Stocks for the Long Run, has done a thorough historical study of the returns of different types of assets over the past couple hundred years.

What he discovered is dramatic:

  • $1 invested in gold in 1802 would have been worth $32.84 at the end of 2006.

  • The same dollar invested in T-Bills, with interest reinvested, would have grown to $5,061.

  • $1 invested in bonds would be worth $18,235.

  • And $1 invested in common stocks with dividends reinvested – drum roll, please – is now worth more than $12.7 million.

The Ultimate Inflation Hedge - Stocks

Read more here

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What you need to know about gold investment

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As our market is going through uncertainties both in politic and economic itself, people are flocking to investments that are able to hedge such uncertainties. Many opt for bonds that offer security but less-than-inflation rate of growth. However, there is one vehicle of investments that strive in the time of political and economic struggle. It’s gold.

Before you jump straight into this golden arena, there are few things that you have to know. This guide will ensures that you will be better prepared in Q&A session with your investment advisor.

Question. What kind of gold should I buy?

Answer. Gold comes in many forms. So you have to know which suits you best. First we have bullions or gold coins. In Malaysia, the only bullion coins is Kijang Emas. It’s available through local banks. You can get more info from Maybank page.

If you are not keen to keep the coins by yourself, you can save the hassle by opening gold investment account, like the one offered by Public Bank. This gives peace of mind and reduces unnecessary risk of keeping the real gold in your house.

Q. When should I buy?

A. If you read online articles, they will tell you that it’s always the best time to buy gold. Most probably because those people the ones selling gold. However, it’s quite true but I won’t give you that straight answer. Gold is a limited expensive metal, is not a derivation, have resilient value and rather high liquidity. Besides, the value of gold usually strives when inflation rate increases, currency is having debasement or future economic prospect is in gloom. All of these put gold as a preferred investment when other investment vehicle fail to offer enough confidence to investors.

Q. How much should I buy?

If you would like to have gold as part of your investment, it’s best to consider it as a low risk low return investment. Having said that, I would say 10-30% is a good range when economic is having a good time and you can increase it if you are expecting economic slowdown. That’s it if you are a speculative investors, if not, just do regular investment on gold and you should be fine.

Q. How about gold stock?

A. Gold stock are shares of companies that deal with gold mining, extraction, processing and minting. While it’s closely related to gold, it’s still stock, not precious metal. If the stock rides on the bull market because of gold, you are lucky but it doesn’t offer the same qualities that people seek by investing in gold. So make sure you know what you are doing.

Q. Where can I track daily gold price?

A. Kitco has a good graph of daily gold price movement on their site. Check it out.

Q. Ok, I’m interested, what should I do now?

A. If you are ready to make gold investment, go to nearby bank and ask them about it. You’ll learn a lot more when you already have basic of gold investment.

Good investing

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[reading 1, 2, 3]

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Mirror Mutual Fund Performance

If you think mutual fund is not enough for you and you want to be more in charge of your investment, guess what is the best for you? Create your own mutual fund.

Seriously, can I do that?

Not legally as you have to get license and whatnots but on personal scale, it’s as easy as buying stocks.

I know you are joking but why would I do that?

The biggest advantage of buying your own fund is that you can evade the enormous 6.5% initial fee and 1.5% annual management fee. Let’s see how the fees eat up your profit.

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The diagram uses 6.00% initial fee and 1.5% annual fee. At the end of the 5-th year, you almost lose 33% of your profit to the fees. Scary huh?
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Explaining Subprime Crisis

img89Subprime mortgage was not in my financial vocabulary until last summer, when it shocked global market with unabated effect. Let’s learn more about this crisis.

What is Subprime Mortgage?

Basically it’s a mortgage for people with shaky credit, or specifically, people who is unlikely to be able to pay the mortgage. Usually it’s given to those who are seeking money to finance their houses.

Why banks (lenders) give money to those who can’t pay?

If banks are doing something, they are doing it for money. Dealing with subprime mortgage is a big risk but the interests rate for it is also high. Usually subprime borrowers will have to pay lesser interests rate for the first year and the rate climbs up for the later years. This is the time when borrowers start to have problem paying their monthly payment.

If borrowers can’t pay, won’t the banks loss their money?
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What is Your Move?

If you has been following our market trend lately, you would notice that our stock market was plummeting down. With just several days, our Composite Index has come down to 1191.55 point from almost touching 1400 point. And with it, almost all of mutual fund were losing value too.

Here we come again to the point of making decision. Are you going to cut loss and retreat from stock market/sell your mutual funds? Or you just take it as one of the dismissible volatility and stick to you buy and hold strategy? Whatever you choice , just don’t panic.

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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.

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Are Investors Doing The Right Things?

img9Believe it or not, among the people who invest, mutual fund buyers are the ones who mostly do the opposite of what they should do, buy low and sell high.

By studying cash flows (tracking the movement of money into and out of mutual funds), 2 financial research institutions, Dalbar and Morningstar, found that the vast majority of people buy investments when prices are high, and they sell when prices are low. Read the rest of this entry »

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Invest in Unit Trust Using EPF (KWSP) Fund

The Employees Provident Fund (EPF) or KWSP is a national social security organization. Basically, it helps you to save money for retiring age or in other words, to help you retiring with enough money in the pocket. While you can’t withdraw/use your fund as often as you like, EPF lets you invest some portion of your fund in appointed investment vehicles such as Unit Trust.

Are You Eligible? Read the rest of this entry »

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Standing Instruction

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Whoa.. what a boring topic. However this might be the answer for ‘undisciplined’ people to invest. In my posts about ASB, there are a lot of people saying that they make a loan to discipline themselves to invest. Well you don’t have to take a loan for such thing. Make a Standing Instruction(SI) instead. SI is just like an automatic bill payment but instead of paying bill, it puts your money into your investment every month, automatically.

SI works best with unit trust. It allows you to take advantage of dollar-cost-averaging concept by investing both in bear and bull market. If you are not into investment, have it deposit into you saving account, or bonds.

The best part of SI is that you won’t realize that you are saving money. For new investors, I know it’s not a great feeling to put aside some of your income every month if you do it manually. You feel that your monthly paycheck is not even enough for you and your family, let alone for investing.

Sooner or later, you will get used to your currently reduced paycheck and you are saving money at the same time! And you will thanks yourself when you realize that you have tens of thousand Ringgit in your account when you need it the most.

What are you waiting for? Contact your banker/unit trust agent/broker to start an SI for you and start saving now!

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