Regular Saving Plan or Dollar Cost Averaging plan is a very safe investment plan. You will never lose money if you use this plan.
This recommendation says if you have a Regular Saving Plan, you will be investing according to your schedule and the intended fixed amount regardless how the condition of the market. If the market is high, you will purchase fewer unit, but if the market is low, you will purchase more unit. At the end of the day, they will altogether average down the cost of purchase. It is a very safe plan that we don’t have worry about losing our investment in a long run. At the end of the day, our investment will have a guarantee return in profit. This plan is also called Dollar Cost Averaging strategy.
While this investment plan may sound logical and convincing. However, we all have to know that investment profit is all about the difference between your entry price and exit price. Whenever the exit price, or redemption price is higher than the entry price, or purchase price you will have a profit. If the redemption price is lower than the entry price, it will turn out to be a losing investment.
Weighted Average Cost
If an investment was done over a few capital entries, the entry price will be averaged and called a “weighted average cost” of investment. If this investment plan is done over a bull market, the weighted average cost will be pulled up along the way. If it is done over a downhill market, the weighted average cost will be pulled down, and becomes cheaper and cheaper. This is what every investor would hope to see. However, when this investment plan has been done over half way through, this pulling effect becomes not so effective anymore. Because the capital has become too large, all those subsequent investment would not be able to effectively pull the weighted average cost either up or down. This will be good if market will continue its uptrend until the end of investment plan.
However, this will turn out to be a disastrously losing when the market down turn happens about the end of the investment period. Because by then, the redemption price will be lower than the weighted average cost. This will be especially true when market remains low for a longer period of time such as in 1929 recession.
A typical example is with a person called Mark. He used this method to invest RM 1,000 each month for 9 years. But he was shocked to find out that his investment is actually losing about RM 20,000 on March 2019. For reason as I have already laid out above, Malaysia market is very much bearish in 2018-2019 and I have also offered my explanation there under his question at KC Lau’s web blog.
As a result, regular saving plan or dollar cost average does not have a guarantee tag behind it. It will all depend the time when the investor redeems his investment. If you have used this plan over a long period of time during the current bull market run, I would strongly suggest you to do something before market really go into recession in the next few years just before you ended your investment plan.
Safe Guard Your Capital
It might be better off if you switch your existing large capital into a bond fund or market money fund now to earn a profit rate slightly higher than fixed deposit. And let your regular saving plan continues on with a smaller capital. In this case, if market down turn happens, your future incoming investment will be effectively bringing the weighted average cost down.
There would be 2 possible scenarios at the end of your investment period. Firstly, the market down turn did not happen before you ended your investment. In this case, you still have taken profit previously and would have earned additional income from bond fund or money market, and your regular saving plan has not stopped either.
Second scenario would be market downturn really happened in the following one of those years; in which case you will be like striking jot pot. You can strategically reinvestment your capital back into the same fund by switching back after the market has touched bottom. When market reverses you will earn gigantic profit.
Hopefully this down turn will not happen during your final year. Because by then you will not have enough time to reinvest and wait for market reverses. Nevertheless, it is still better than redeeming your capital at a losing price.
The bottom line is all investment with profit does not come without paying any price to learn. There is no way of any guarantee of profiting if we do not pay any attention to the nature of investment and market cycle. Even with this regular saving plan, it has half a chance to be losing if you do not have longer time horizon between now and your final redeeming year.
We do not know the future whether there will be a market crush, but what we know is the present. At present, your investment is surely be profiting because we are in the midst of a long bull market run. And you have the freedom to lock up your profit for long term security. I believe it is wiser to keep your hard earned capital and profit safe than sorry. We rather choose to earn less than to lose much, don’t we?
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