This is an example of the unit trust's price (NAV).
The "V" events in unit trust's graph is common. Why not use it wisely?
If a "V" happens in a graph, this is what happens when autodebit or regular monthly investment of RM1000 is done. Look at the profit. What do you think? This is actually the safest way to invest in unit trusts.
Let us see what happens if we add in a little more value every time the price goes down go back to the initial investment value every time the price goes back up. Is that not a better profit?
Want to see that value in millions? Or lets just put hundred thousands...
However, this may take years to complete. Sometimes a few months. It depends entirely on which funds you put your money into. There are three types: Very aggressive funds, Moderately aggressive funds, balanced funds, non-aggressive funds (bonds or money market which only goes up surely but slowly).
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Dollar Cost Averaging is defined as a constant investment into a fund at predetermined times such that the investor purchases more units when the price is low and less when it is high.
What this simply means is that you start a savings plan with a unit trust and you devote a fixed dollar amount towards purchasing it every month (or week, or quarter, whatever the predetermined period may be).
Let's say you put aside RM200 every month. If the price of the unit trust is low this month, say about RM1.80, your RM200 allows you to buy about 111 units. Next month, the price of the unit trusts may have risen to say RM2.000. Your RM200 would buy you 100 units. The 3rd month the price drops again to RM1.50, at which you acquire 133 units.
Altogether you would have spent RM600 and purchased 344 units in those three months. The average price of each unit would be RM600 divide by 344 units = RM1.74.
If you had spent all your RM600 in the first month, you would have paid RM1.80 per unit. So 'averaging' allowed you buy the units at a lower average price.
What is Value-Cost Averaging?
If you had invested in unit trust or mutual funds, I am sure that you had heard of Dollar-Cost Averaging (DCA). Another strategy not commonly used in unit trust investment is Value-Cost Averaging (VCA). For long elaborated explanation, you can refer Rajen Devadason’s article here.
VCA is more advanced than DCA. It requires more calculation and monitoring. Thus, it should provides better return than the normal DCA strategy.
For DCA implementation, we invest the fixed amount of cash at a regular basis, e.g. RM500/month, RM3000/quarter or RM10,000/year. But for VCA, it depends on the targeted fixed value of investment, which look something like this:
1st year – RM10,000 in Fund A
2nd year – RM10,000 x 2 in Fund A (RM20,000)
3rd year – RM10,000 x 3 in Fund A (RM30,000)
It is easier to be implemented in direct stock investment. Let’s take iCapital closed-end fund as an example.
ICAP fund performance (source: The Star Online)
In October 2006, you bought RM10,000 of ICAP price RM1.30, total unit is 7692.30 unit. In real case, you will have to buy 7700 unit.
In October 2007, your targeted value of your ICAP holding is RM20,000. But now the price is RM2.18. Your existing investment value is 7692.30 x RM2.18 = RM16769.23. Since your targeted investment value in ICAP is RM20,000, still short of RM3230.77. The number of unit you need to top up now is RM3230.77/RM2.18 = 1482 unit. In real case, you will have to buy 1500 unit.
In October 2008, let’s say ICAP falls to RM1.50. Your targeted value at that time is RM30,000. Your investment value at that time will be RM1.50 x (1482 + 7692.30) = RM13761.45. So you will have to invest additional RM30k – RM13761.45 = RM16238.55. The additional unit will be RM16238.55/RM1.50 = 10825.70.
Total invested = RM10k + RM3230.77 + RM16238.55 = RM29469.32
Total unit of ICAP = 7692.30 + 1482 + 10825.70 = 20,000
Average unit cost = RM29469.32/20,000 = RM1.47.
If you are using DCA instead of VCA,
October 2006 – RM10,000/RM1.30 = 7692.30
October 2007 – RM10,000/RM2.18 = 4587.16
October 2008 – RM10,000/RM1.50 = 6666.67
Total unit = 18946.13
Average unit cost = RM30,000/18946.13 = RM1.58
This concludes that VCA is better than DCA because you will get a lower cost per unit of share.
But before you jump into using this strategy, here are some downsides you should consider:
when the value of the investment keeps dropping, you will need to fork out more money to invest. Don’t go over the roof and bankrupt when the value drop to zero. But sometimes, there are no resources left to invest to make up the targeted value. For the case study above, in October 2008, the investor might not have RM16k to invest.
when the value goes up, you just invest less and less. You will have to find other investment to park your additional money that is not invested.
I think the best way is to keep to your fixed portfolio. No matter how much you can afford to invest at any particular time, just always stick to the same asset allocation as predetermined. Unless your investment objective had changed.
Definition of 'Value Averaging'
An investing strategy that works like dollar cost averaging (DCA) in terms of steady monthly contributions, but differs in its approach to the amount of each monthly contribution. In value averaging, the investor sets a target growth rate or amount on his or her asset base or portfolio each month, and then adjusts the next month's contribution according to the relative gain or shortfall made on the original asset base.
Investopedia explains 'Value Averaging'
For example, suppose that an account has a value of $2,000 and the goal is for the portfolio to increase by $200 every month. If, in a month's time, the assets have grown to $2,024, the investor will fund the account with $176 ($200 - $24) worth of assets. In the following month, the goal would be to have account holdings of $2,400. This pattern continues to be repeated in the following month.
The main goal of value averaging is to acquire more shares when prices are falling and fewer shares when prices are rising. This happens in dollar cost averaging as well, but the effect is less pronounced. Several independent studies have shown that over multiyear periods, value averaging can produce slightly superior returns to dollar-cost averaging, although both will closely resemble market returns over the same period.
The biggest potential pitfall with value averaging is that as an investor's asset base grows, the ability to fund shortfalls can become too large to keep up with. This is especially noteworthy in retirement plans, where an investor might not even have the potential to fund a shortfall given limits on annual contributions. One way around this problem is to allocate a portion of assets to a fixed-income fund or funds, then rotate money in and out of equity holdings as dictated by the monthly targeted return. This way, instead of allocating cash in the form of new funding, cash can be raised in the fixed income portion and allocated in higher amounts to equity holdings as needed.
Read more: http://www.investopedia.com/terms/v/value_averaging.asp#ixzz1hqELHUZK
A variant of dollar-cost averaging, called value averaging, has shown some usefulness in improving returns. With value averaging, you set a dollar target for your investments — for example, that you want your account to rise by $1,000 a month. Let's say you invest $1,000, and the next month the account has fallen to $950. You contribute $1,000, plus another $50 to make up for the previous month's shortfall.
Value averaging makes you invest more when the market is down and less when the market is up. The big hitch: If the market is down a lot in one month, you have to pony up a lot more money.
The other hitch: Value averaging is more work than dollar-cost averaging. "It makes you do some math every month," says John Markese, president of the American Association of Individual Investors.
Despite all the knocks against dollar-cost averaging and value averaging, Markese likes both strategies. "You'll never get rich, but you'll get invested in a disciplined manner," he says.
If you really want to increase your account balances over time, you should simply increase the amount you invest. If you invest $100 a month, your contributions make a huge impact after one year but fairly little after a decade, because it's a smaller percentage of your total. If you increased your contribution by 5% every year, though, your account would be worth nearly $20,000. Most of that would be your own money. But it's still a big improvement.
http://www.greekshares.com/dollarcost.php
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