Showing posts with label dollar cost averaging. Show all posts
Showing posts with label dollar cost averaging. Show all posts

Tuesday 5 May 2020

‘Fortunes are going to be made’ — Suze Orman on investing amid the coronavirus pandemic


Published: May 4, 2020

‘I can guarantee you that if you stay in and you just stick with it, three years from now you will be very, very happy that you did’  Suze Orman

Celebrity financial adviser Suze Orman isn’t for everybody. She once told MarketWatch that “there are people that hate my guts. You don’t even want to know the things they say.”

But there’s no denying that her common sense brand of money management has resonated with her devoted fan base over the years. Lately, with many in that fan base struggling to navigate the coronavirus pandemic, she’s been hitting the media circuit to address just some of the issues.

During a CNN segment that aired on Saturday, Orman was asked by a viewer how to approach investing in the stock market in the face of the historic volatility.

Here’s her answer:

‘Let’s just assume you have an eight-month emergency fund. Let’s assume you have no credit card debt. Let’s assume that you still have money coming in. You should be dollar-cost averaging every single month into the stock market.’

In other words, she’s advising those without more-pressing obligations to take a specific sum of money and invest it every month into something like the Vanguard Total Market ETF VTI, +0.38% .

“If you do it month in and month out and you have at least three five or 10 years or longer until you need the money you will be happy,” she continued. “If you need money within a year it’s not money that belongs in the stock market. Take it out now.”


Back in late February, when the Dow Jones Industrial Average DJIA, +0.11% had dropped more than 1,000 in a single session on fears of what the coronavirus could do to the U.S. economy, Orman raised a few eyebrows when she said “I rejoice” in the face of such pullbacks.

She used the opportunity to again push her case for dollar-cost averaging.

“The higher the market goes, the shares cost more, the less shares their money buys, the less money they make, in the long run,” she told CNBC. “With this dip, if it continues to go down, they should just stay the course and actually be quite happy because the market is still incredibly high.”

One month and a brutal stretch of market losses later, the New York Times best-selling author returned to CNBC in late March to urge investors to stick with the plan.

“You will never, ever, know the bottom. You will never, ever, know the top,” she said. “Fortunes are going to be made out of this time. So just stay calm. I can guarantee you that if you stay in and you just stick with it, three years from now you will be very, very happy that you did.”

Here’s Orman talking financial stability in a recent appearance on the Tamron Hall Show:


Orman, of course, is not alone in pushing the time-tested dollar-cost averaging approach.

For instance, Kimberlee Orth, the Ameriprise private wealth adviser who was ranked No. 2 in the U.S. among her peers in 2019 by Barrons, recently urged investors to stick with the same plan.

“If you were already in the market on Feb. 1 or March 1 or April 1, and you watched the market go down and those resources are allocated to a long-term goal and your risk tolerance is still suitable,” she said, “there’s no need to change that because the market is eventually going to go back up.”

Stocks took a hit early in Monday’s session, with the Dow off more than 1%, while both the S&P 500 index SPX, +0.42% and the tech-heavy Nasdaq Composite COMP, +1.22% also traded lower.

https://www.marketwatch.com/story/suze-orman-on-investing-in-the-stock-market-amid-pandemic-just-do-it-2020-05-03?mod=mw_latestnews&link=sfmw_fb&fbclid=IwAR2ug76ODx0mcvhLHoxWzy2jkysspaPIq-ju7ayxT8YSpLjVgA69eJeFn70

Wednesday 17 December 2014

Strategy during crisis investment: Revisiting the recent 2008 bear market


FRIDAY, FEBRUARY 26, 2010


Strategy during crisis investment: Revisiting the recent 2008 bear market

Although we may not know where the bear bottom is, buying in a down market may still lead to losing money. This is definitely true. As long as the purchase is not at market bottom, it may still result in losses for the time being. This is likely to be a short-term loss but compensated by a probable long-term gain. Even if we cannot time the market perfectly, we are definitely better off to “buy low and sell high” then to “buy high and sell low”.

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Prices fell but value intact

Presently stock prices have fallen sharply. 

  • Banks are trading at 1x book value, 
  • property stocks sold at 50% discount from net asset value, 
  • utility stocks trading at single-digit price-earnings ratio providing an earnings yield of more than 10% net of tax and 
  • there are many good stocks trading at dividend yield of 2x bank interest rates. 

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Warren Buffett, the second richest man in the world who makes his fortune from stock investment, is busy buying undervalued companies. He sees the value and he also sees prices detaching away from the intrinsic values.He said: “I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turn up.”

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Catching a falling knife

Some may argue that buying now is like catching a falling knife. If you are not careful, you may be hurt and suffer more losses from falling stock prices.There is no doubt that we may incur short-term losses as long as we do not buy at the bottom. On the other hand, who can determine where and when is the bottom. As long as there are still unknown events or hidden problems, an apparent bottom now may not be the eventual bottom.Since we do not have all the information in the market, it is almost impossible to guess where the bottom will be.

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In most cases, we only realise the bottom after it is over and by that time stock prices are running high with much improved market confidence. Market bottom could be there only for a short period. In most cases, market did not stay at the bottom waiting for investors. It will just move on.

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Since market moves ahead of the economy by about six months, the market bottoms out when the economy is still gloomy, news are still negative, analysts are still calling underweights and most investors are staying at the sidelines.

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Handling something we know is definitely much easier than dealing with the unknown risks, something which hits from behind without warning.When we invest during a crisis we actually go in with our eyes open. We know it is definitely risky but we also know it could also be very profitable. If we can handle the risk, the risk-reward trade-off will be very rewarding.

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Emphasise strategies

What we need is to buy near the bottom, not right at the bottom. Investors’ frequent question now is when to buy, that is where is the bottom? Perhaps it is more intelligent to ask how much to buy now since nobody will be able to guess where is the market bottom.

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Staggered buying is preferred over bullet purchase which is taking the risk of timing the market bottom. In staggered buying, a pre-determined amount will be set aside for investment over time, say in 10 equal portions. 

One common method of staggered investment is dollar cost averaging, an investment scheme made in equal portions periodically, either by a small amount monthly or larger amount quarterly. There are also several variations of staggered investment.

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Anyway, staggered purchase is a preferred method to avoid the anxiety of market timing and the mixed feeling of fear of further downside and worry of missing the market rebound. As long as the market is undervalued, the strategy of staggered investment ensures that investors are in and are benefiting from the undervalued market. 


http://klsecounters.blogspot.com/2008/11/strategy-during-crisis-investment.html  


http://myinvestingnotes.blogspot.com/2010/02/strategy-during-crisis-investment.html

Monday 3 March 2014

Benjamin Graham's advice to guide investors in a falling market

If You Think Worst Is Over, Take Benjamin Graham's Advice
By JASON ZWEIG

May 26, 2009

It is sometimes said that to be an intelligent investor, you must be unemotional. That isn't true; instead, you should be inversely emotional.

Even after recent turbulence, the Dow Jones Industrial Average is up roughly 30% since its low in March. It is natural for you to feel happy or relieved about that. But Benjamin Graham believed, instead, that you should train yourself to feel worried about such events.

At this moment, consulting Mr. Graham's wisdom is especially fitting. Sixty years ago, on May 25, 1949, the founder of financial analysis published his book, "The Intelligent Investor," in whose honor this column is named. And today the market seems to be in just the kind of mood that would have worried Mr. Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over.

You can't turn off your feelings, of course. But you can, and should, turn them inside out.

Stocks have suddenly become more expensive to accumulate. Since March, according to data from Robert Shiller of Yale, the price/earnings ratio of the S&P 500 index has jumped from 13.1 to 15.5. That's the sharpest, fastest rise in almost a quarter-century. (As Graham suggested, Prof. Shiller uses a 10-year average P/E ratio, adjusted for inflation.)

Over the course of 10 weeks, stocks have moved from the edge of the bargain bin to the full-price rack. So, unless you are retired and living off your investments, you shouldn't be celebrating, you should be worrying.

Mr. Graham worked diligently to resist being swept up in the mood swings of "Mr. Market" -- his metaphor for the collective mind of investors, euphoric when stocks go up and miserable when they go down.

In an autobiographical sketch, Mr. Graham wrote that he "embraced stoicism as a gospel sent to him from heaven." Among the main components of his "internal equipment," he also said, were a "certain aloofness" and "unruffled serenity."

Mr. Graham's last wife described him as "humane, but not human." I asked his son, Benjamin Graham Jr., what that meant. "His mind was elsewhere, and he did have a little difficulty in relating to others," "Buz" Graham said of his father. "He was always internally multitasking. Maybe people who go into investing are especially well-suited for it if they have that distance or detachment."

Mr. Graham's immersion in literature, mathematics and philosophy, he once remarked, helped him view the markets "from the standpoint of eternity, rather than day-to-day."

Perhaps as a result, he almost invariably read the enthusiasm of others as a yellow caution light, and he took their misery as a sign of hope.

His knack for inverting emotions helped him see when markets had run to extremes. In late 1945, as the market was rising 36%, he warned investors to cut back on stocks; the next year, the market fell 8%. As stocks took off in 1958-59, Mr. Graham was again pessimistic; years of jagged returns followed. In late 1971, he counseled caution, just before the worst bear market in decades hit.

In the depths of that crash, near the end of 1974, Mr. Graham gave a speech in which he correctly forecast a period of "many years" in which "stock prices may languish."

Then he startled his listeners by pointing out this was good news, not bad: "The true investor would be pleased, rather than discouraged, at the prospect of investing his new savings on very satisfactory terms." Mr. Graham added a more startling note: Investors would be "enviably fortunate" to benefit from the "advantages" of a long bear market.

Today, it has become trendy to declare that "buy and hold is dead." Some critics regard dollar-cost averaging, or automatically investing a fixed amount every month, as foolish.

Asked if dollar-cost averaging could ensure long-term success, Mr. Graham wrote in 1962: "Such a policy will pay off ultimately, regardless of when it is begun, provided that it is adhered to conscientiously and courageously under all intervening conditions."

For that to be true, however, the dollar-cost averaging investor must "be a different sort of person from the rest of us ... not subject to the alternations of exhilaration and deep gloom that have accompanied the gyrations of the stock market for generations past."

"This," Mr. Graham concluded, "I greatly doubt."

He didn't mean that no one can resist being swept up in the gyrating emotions of the crowd. He meant that few people can. To be an intelligent investor, you must cultivate what Mr. Graham called "firmness of character" -- the ability to keep your own emotional counsel.

Above all, that means resisting the contagion of Mr. Market's enthusiasm when stocks are suddenly no longer cheap.



http://online.wsj.com/news/articles/SB124302634866648217?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB124302634866648217.html

Friday 28 February 2014

The Benefits of Dollar-Cost Averaging in a Volatile Market

The Benefits of Dollar-Cost Averaging


Volatile Market that ends up flat

Period      Amount       Price        No of shares 
             Invested $      $       Purchased 
1       1,000       100       10.00 
2       1,000         80       12.50 
3       1,000         60       16.67 
4       1,000         80       12.50 
5       1,000       100       10.00 
                  
Total Invested       5,000             
Total shares purchased                   61.67 
Average cost of shares purchased $                   81.08 
Value at period 5 ($)             6,166.67       
                  
                  
                  
Ebullient Market that rises continually                  
                  
Period      Amount       Price        No of shares 
             Invested $      $       Purchased 
1       1,000       100       10.00 
2       1,000       110       9.09 
3       1,000       120       8.33 
4       1,000       130       7.69 
5       1,000       140       7.14 
                  
Total Invested       5,000             
Total shares purchased                   42.26 
Average cost of shares purchased $                   118.32 
Value at period 5 ($)             5,916.32       


The table above shows that you actually end up with more money in the scenario where the market is very volatile and ends up exactly where it began.

In both cases, a total of $5,000 is invested over the 5 periods.  

In the flat volatile market, the investor ends up with $6,167, while in the scenario where market prices rise continually, the investor's final fund stake is only $5,915.



Learning Points:

Warren Buffett, has a nice way of showing that you might actually wish for lower stock prices (at least for awhile) after you begin your investment program.

He writes:

If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?  Likewise, if you are going to buy a care from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?  These questions, of course, answer themselves.

But now for the final exam:  If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period?   Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.  In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying.  This reaction makes no sense.  Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

How to be a millionaire? Save regularly and save early.

Dollar Cost Averaging Can Reduce the Risks of Investing in Stocks and Bonds

Dollar cost averaging is not a panacea that eliminates the risk of investing in common stocks.  

It will not save your investment plan from a devastating fall in value during a year such as 2008, because no plan can protect you from a punishing bear market.  

You must have both the cash and the confidence to continue making the periodic investments even when the sky is the darkest.

No matter how scary the financial news, no matter how difficult it is to see any signs of optimism, you must not interrupt the automatic pilot nature of the program.  

Because if you do, you will lose the benefit of buying at least some of your shares after a sharp market decline when they are for sale at low prices.  

Dollar cost averaging will give you this bargain.  Your average price per share will be lower than the average price at which you bought shares.  

Why?  Because you will buy more shares at low prices and fewer at high prices.

Some investment advisers are not fans of dollar cost averaging, because the strategy is not optimal if the market does go straight up.  (You would have been better off putting all $5,000 into the market at the beginning of the period.).  

But it does provide a reasonable insurance policy against poor future stock markets.  

And it does minimize the regret that inevitably follows if you were unlucky enough to have put all your money into the stock market during a peak period such as March of 2000 or October of 2007.

There is tremendous potential gains possible from consistently following a dollar-cost averaging program.

Because there is a long-term uptrend in common stock prices, this technique is not necessarily appropriate if you need to invest a lump sum such as a bequest.

If possible, keep a small reserve (in money fund) to take advantage of market declines and buy a few extra shares if the market is down sharply.  

Though you should not try to forecast the market, it is usually a good time to buy after the market has fallen out of bed.

Just as hope and greed can sometimes feed on themselves to produce speculative bubbles, so do pessimism and despair react to produce market panics.  

The greatest market panics are just as unfounded as the most pathological speculative explosions.  

For the stock market as a whole (not for individual stocks), Newton's law has always worked in reverse:  What goes down has come back up.  


(A Random Walk Down Wall Street, by Burton Malkiel)

Wednesday 26 February 2014

Burton Malkiel: Timeless Lessons for Investors



1.  Buy and Hold.  Don't time the market

He started his talk by tackling the issue :  "In the light of the 2008 Global Financial Crisis when the market dropped almost 50%, is buy and hold is now dead?"
The best days in the market that gave the best returns were usually the few days that leaped from the bottom of the market.
Don't try to time the market.  It is dangerous.  You can't do it and you will make mistakes.

2.  Dollar Cost Averaging

You make more likely to make more money in a volatile time than a steadily rising market, but this is not always the case.  Of course, if you know the market is going to be steadily rising, you will make more money if you invest a lump sum at the beginning..

3.  Rebalance your portfolio.

He advises rebalancing your portfolio once yearly, example, 60% stock and 40% bond target and rebalancing in January every year.  In a volatile market, rebalancing reduces the volatility and may also increase the return of your portfolio.  In a rising market, rebalancing will reduce the volatiltiy and may reduce the return of your portfolio slightly.

4.  Diversification

In 2008 and early 2009, there were few places to hide.  Many people opined that diversification doesn't work anymore.
Diversification works when the asset classes are not correlated.  Though many asset classes are now more correlated, you can still diversify, example, buying emerging markets and bonds.  How do you access China?  Why not through index funds? (@39 min)

5.  Costs matter

The lower the costs charged by the purveyor of the investment service, the better and the more is left for you.  "You get what you don't pay for!"  Cost you pay is the one thing you can control and you may increase your return by up to 2% per year just by ensuing the cost is low.  He advocates index funds.  Stock market is a zero sum game and costs of mutual funds of >1% shift the distribution of the stock market to that of a negative sum game.  90% of professional managed mutual funds are beaten by the index benchmark.  In his study of mutual funds over many years, less than 5 mutual funds have beaten the market by 2% or more ( @ 29 min).  Buy the index funds.  "It is like searching for the needle in the haystack.  Buy the haystack instead.".
Two-third of bond active managers are beaten by bond-index funds.  His advice is that the core of your portfolio should be in low cost index funds. (You can have more leeway in a satellite portfolio too.)


Q&A:
@ 43 min   Lump sum investing early or Dollar Cost Averaging when you have a big sum of money to invest.
Potential regret of getting into the high of the market.  Reduction in volatility.  Might not always be optimal.  At least some of this big sum of money should still put into the market in dollar cost averaging manner. Can you advise how long to spread this dollar cost averaging?  Depends on the returns from the alternative investments.  Spread your investing over a shorter period now, since the alternative investment return (interest rate)  is low.

@ 48 min.  Missing the 10 best days or missing the 10 worst days.  Some bias in presentation.

@50.30 min.  Corporate governance.

@53 min.  Dividend yield stocks of Warren Buffett.  Buffett is really the needle in the haystack.  Vanguard REIT - a good diversifier.

@1.04.50 min.  How would you invest $1 million?

@1.08.30 min.  What are the target percentages people of various ages should save?  Answer:  MORE.  If you start early, you may have to save a lot due to the compounding effect.  Those who did not save early, probably need to save a lot more to catch up (20% or more).  The opportunity cost of not saving $1 in your 20s might be $10 or $15 when you are in your 50s.






Uploaded on 1 Jun 2010
Dr. Burton G. Malkiel, the Chemical Bank Chairman's Professor of Economics at Princeton University, is the author of the widely read investment book, A Random Walk Down Wall Street. He has also authored several other books, including the recently published The Elements of Investing.

Dr. Malkiel has long held professorships in economics at Princeton, where he was also chairman of the Economics Department. He also served as the dean of the Yale School of Management and William S. Beinecke Professor of Management Studies. Dr. Malkiel is a past president of the American Finance Association and the International Atlantic Economic Association, and a past appointee to the President's Council of Economic Advisors. He continues to serve on several corporate and investment management boards.

Thursday 25 October 2012

Is Dollar-Cost Averaging Overrated?



Question: Every year I add money to my IRA account in a lump sum. Would I be better off using dollar-cost-averaging over the course of the year?
Answer: Dollar-cost-averaging, which is a technical term for buying shares of a stock or mutual fund in equal dollar amounts and at regular intervals, is assumed by many investors and financial pros to be the best way to invest. The advantages are clear: By investing a given amount over time and in equal-sized chunks rather than all at once, the investor ends up buying more shares when prices become cheaper and fewer when they become more expensive.
For example, let's say you get a $1,200 tax refund. Rather than invest all $1,200 at once, you could invest $100 per month for a year. Now let's say the fund you're investing in sells for $10 a share in the first month but drops to $5 a share in the second. Using the dollar-cost averaging method, you would end up buying 10 shares in the first month, before the market drop, but 20 shares in the second, after the drop. Had you invested the entire $1,200 in the first month you would have owned 120 shares, which, in month two, would have declined in value to $600. In this way, dollar-cost averaging helps reduce an investor's exposure to a potential market downturn, a danger inherent in the lump-sum approach.
Dollar-cost averaging also fosters a level of investing discipline. Rather than trying to figure out the best time to invest a lump sum, dollar-cost averaging uses a more systematic approach that helps investors conquer bad habits such as buying shares only when the market is up.
If you have an employer-sponsored retirement account, you may be using dollar-cost-averaging without even knowing it. That biweekly or monthly contribution made to your 401(k) is a form of dollar-cost-averaging.
Putting Dollar-Cost Averaging to the Test
However, despite the conventional wisdom that dollar-cost averaging is usually the best way to invest, there is an opportunity cost to be paid for holding money in cash while it waits to be invested in the market. If the market goes up while you're dollar-cost averaging into it, you've lost out on any gains you would have had by investing the entire amount right away.
In fact, a recent Vanguard study found that, on average, lump-sum investing resulted in higher returns than dollar-cost averaging about two-thirds of the time. The authors looked at historical monthly returns for $1 million invested as a lump sum and through dollar-cost averaging over periods as short as 6 months and as long as 36 months, assuming that funds were kept in cash before being invested. They tested various stock/bond allocations ranging from an all-equities portfolio to an all-bond portfolio. Finally, they tested these variations on the dollar-cost averaging vs. lump-sum question over rolling 10-year periods from 1926-2011.
At the end of each 10-year period, the portfolio value of the lump-sum method was compared with that of the dollar-cost averaging method. The result: The lump-sum method delivered higher returns compared with the 12-month dollar-cost averaging method about 66% of the time regardless of whether an all-equities, all-bond, or 60% equity/40% bond allocation was used. When the authors conducted a similar analysis using historical returns for markets in the U.K. and Australia, a similar pattern emerged, with lump-sum investing consistently outperforming dollar-cost averaging.
The authors note that the longer the dollar-cost averaging time frame, the greater the chance of the lump-sum method outperforming. For example, dollar-cost averaging over 36 months lost out to the lump-sum method 90% of the time (for U.S. markets).
It's also worth noting that while lump-sum investing consistently outperformed dollar-cost averaging, the average rate of outperformance was relatively modest. Using a 60/40 equity-bond allocation in U.S. markets and dollar-cost averaging over a period of 12 months, the authors found that after 10 years the initial $1 million investment would have grown to $2,450,264 on average using the lump-sum method versus $2,395,824 using dollar-cost averaging, a difference of about $54,000 or 2.3%.
DCA Better in Declining Markets 
So the Vanguard study proves it's always best to invest in a lump sum if possible, right? Not so fast. As the authors concede, during market declines, the dollar-cost averaging method often performs better because it helps mitigate the effects of falling share prices, whereas the lump-sum method puts all the capital at risk in the market at once. They examined more than 1,000 rolling 12-month periods in U.S. markets and found that lump-sum investors would have seen their investment decline in value 22.4% of the time vs. 17.6% for dollar-cost averaging.
The Takeway
So what should we make of these findings? There appears to be little doubt that, when investing for the long-term, you'’re more likely to end up ahead using the lump-sum approach than dollar-cost averaging. (Again, assuming you have a choice--with a work-sponsored retirement account, you may not.) However, there are three important points in dollar-cost averaging's favor.
If you expect a market downturn in the near future, dollar-cost averaging is the better choice. By spreading out contributions at regular intervals, you are essentially limiting your exposure by keeping some of your money in cash. 
For some investors, a relatively modest shortfall in return is a small price to pay for piece of mind. If dollar-cost-averaging helps you sleep better at night than you would with an all-in strategy, it may be worth it.
Dollar-cost averaging, especially through an automatic contribution mechanism such as a 401(k) or automatic deduction from a bank account, offers a level of investing discipline that lump-sum investing doesn't. The lump-sum approach, by its nature, involves market timing, and that's a dangerous game to play, especially during times of volatility. Dollar-cost averaging provides a smoother, more consistent entry into the market.One last factor to consider is investing costs, which may provide an advantage for the lump-sum method. For example, if using dollar-cost averaging requires paying multiple brokerage fees to buy shares of a stock in several lots rather than just once, this may further erode your returns as compared with the lump-sum method.
Ultimately, your comfort level with lump-sum investing and your expectations about the market's near-term direction should help you decide if it makes sense for you. If moving a lump sum into the market all at once gives you a queasy feeling in the pit of your stomach, that may be all the answer you need.
Have a personal finance question you'd like answered? Send it toTheShortAnswer@morningstar.com.

Sunday 22 January 2012

Dollar Cost Averaging

Dollar Cost Averaging (“DCA”) often is popular during rising markets.

If DCA is adhered to over many years, then this formula should work.

The difficulty is that few people are so situated that they can invest the same amount each year.

Economic downturns often constrain one’s ability to invest just when stocks are trading at their lowest valuations.

Furthermore, when prosperity for the average investor returns, so too do high valuations.

Wednesday 18 January 2012

Conquer Your Fear of Investing


Updated: 8/11/2011 

Many of the most worthwhile things in life are scary at first. Consider, for example, going to school for the first time, falling in love, learning to drive, starting a family, figuring out your new Tivo…
Investing is no exception. The thought of possibly losing money is a terrifying prospect. And the fact that today’s economy has seen better days probably isn’t helping those fears. Investing in the stock market has its risks. But if you give in to fear, you’ll pass up some incredible opportunities—ones that come with big dollar signs attached.
Now is actually a good time for young adults to bite the bullet and get started investing. Think of a market downturn as a clearance sale: It’s a good idea to go shopping before prices climb again.
Bottom line: Surrendering to fear only holds you back. If you want to get ahead financially, you’ve got to invest in your future. Below are five common excuses and the strategies you’ll need to overcome them.

FEAR: I don't want to lose all my money.

CONQUER IT: Diversify.

If your investments are too heavily-weighted in one stock or even one particular kind of stock, you can deep-six your savings goal. (Remember the tech bubble or, more recently, the financial services crisis?) Mutual funds are a good way to achieve instant diversification because they allow you to invest in dozens of stocks within a single fund.
One of the quickest ways to diversify, if you’re new to investing, is with a fund of funds that invests in other mutual stock funds. Or if you’d like something a little more conservative in this uncertain market, go for a so-called “balanced” fund that owns stocks as well as bonds. But bear in mind that for long-term goals, stocks should earn you the highest return.

FEAR: How will I know the best time to invest?

CONQUER IT: Dollar-cost average.

There’s no crystal ball that tells you exactly when the market will rise and fall. The trick is to invest regularly no matter what the market is doing. A simple strategy called dollar-cost averaging eliminates the guesswork. By investing a fixed dollar amount at regular intervals, such as every month or every quarter, you smooth out the ups and downs of the market. This trick takes out all the emotion—it’s scary to invest when the market’s falling, for example—and investing becomes much less daunting.
Mutual funds are, again, a great investment for dollar-cost averaging because you aren’t charged a commission each time you buy (like you are for individual stocks).

FEAR: I'm too queasy for the ups and downs of investing.

CONQUER IT: Ignore your investments.

When you obsess over how your investment is doing from day to day or week to week, you could be more tempted to tinker with it instead of sticking to your long-term diversified plan. Not to mention, you’ll probably lose sleep.That’s not to say you shouldn’t ever reevaluate your investment choices. Just don’t fixate on them.

FEAR: I don't have the time or knowledge to manage a portfolio well.

CONQUER IT: All-in-one funds or index funds.

Think simple. When you start investing and aren’t sure what you’re doing, don’t pretend you do. Truth is, most actively managed mutual funds don’t beat their market benchmarks. If those fund managers have the time, the education and the motivating paycheck, and they can’t pull it off, don’t worry if you’re afraid you can’t either.
Go with funds of funds to achieve instant diversification. Or assemble a simple index fund portfolio. Index funds don’t try to beat the market benchmarks, they match them. Put 75 percent of your money into a fund that tracks the overall U.S. stock market, 25 percent into one that tracks international stocks. Then let ’em ride. As your investments rise and fall, all you’ll have to do is realign your money every year or so to maintain the proper weighting in each fund.
One more way to set it and forget it: Sign up with your broker or fund company to have your regular contributions automatically withdrawn from your bank account.

FEAR: What if I need the money?

CONQUER IT: Set clear goals and choose your investments accordingly.

Before you start investing, write down what you’re investing for and when you think you’ll need the money.
If you’ll need the money within the next three to five years, preservation is your number-one aim. Put that money somewhere safe and accessible, such as a money market mutual fund or a high-yield online savings account. You could also opt for a bank certificate of deposit. But bear in mind your money is locked in for the term of the CD, and you’ll pay a hefty penalty if you need to cash out early.
If you’re investing for the long term, growth is your goal. Invest that money in a broad-based mutual fund that holds mostly stocks. If disaster strikes and you really need the money, you can cash out at any time – but you’ll have to pay taxes on the money you made.

http://www.kiplinger.com/magazine/archives/2009/01/fred_frailey.html

Wednesday 21 December 2011

Investing in volatile times

Investing in volatile times    Thumbs Up


July 2010

When stock markets are volatile, what should unit trust investors do? Should they take on more risks and ride on the economic and market recovery? This article examines the issues that investors should look out for.

At the peak of the financial crisis in 2008, the FBM KLCI fell from an all-time high of 1,516 points in January 2008 to about 800 points in October 2008. With the index having rebounded to current levels of 1,361 points as at end July 2010, an investor would have made a handsome return of almost 70% if he had invested when the market was at its lowest point.

Chart forFTSE Bursa Malaysia KLCI (^KLSE)

Chart forFTSE Bursa Malaysia KLCI (^KLSE)

However, it is impossible to predict the bottom of the crash and therefore timing the market is virtually impossible for normal investors. With no crystal ball in hand, the ringgit-cost averaging method could provide retail investors with reasonable returns as markets recovered. This is provided that investors have a long-term perspective and are patient enough to ride through the market’s ups and downs.

Ringgit-cost averaging strategy is designed to reduce volatility by investing fixed dollar amounts at regular intervals, regardless of the market’s direction. Thus, as prices of securities rise, fewer units are bought, and as prices fall, more units are bought.

Depending on the risk profile and objectives of their funds, professional fund managers may capitalise on market volatility by bargain-hunting oversold stocks and divesting stocks that have become overvalued. By doing so, they seek to take advantage of mispricing of assets during volatile times. Given the sophistication of these investment strategies, unit trust investors should focus on a regular investment plan and let the fund managers deal with the volatility of markets.

How should unit trust investors respond to volatility?

Past performance of unit trust funds should be evaluated based on returns and volatility. Investors should try to assess whether a funds’ volatility is caused by market conditions which affect the performance of similar funds across the board or whether it is caused by the fund managers’ investment decisions to take on more risks.

It is quite clear that the primary reason for equity funds to be volatile in recent years is due to market volatility in various financial assets. As mentioned earlier, global stock markets sustained heavy losses as the US subprime crisis spread across the world in 2008, causing global financial institutions to write off US$1.7 trillion in debts. Subsequently, equities have rebounded in 2009 following signs of a recovery in economic activities in response to the fiscal and monetary stimulus measures undertaken by governments and central banks around the world.

The commodity bubble also burst in mid-2008, led by escalating crude oil prices which hit a high of US$147 per barrel in July 2008 before plunging to US$33 per barrel in December 2008. Volatility was also seen in the foreign exchange market as the financial meltdown forced U.S. investors to withdraw offshore funds to be repatriated back home, causing the US$ to strengthen in 2008. Subsequently with the recovery in equity markets, the US$ weakened in 2009 as investors were willing to take on more risks.

With volatility still in the current market, how can investors plan their investments before putting money into unit trusts?

Volatility is often viewed as negative as it is associated with risk and uncertainty. However, with a disciplined and consistent approach, investors can position themselves to achieve potential long-term returns from the market. In general, investors seeking above-average returns should be prepared to accept higher risks in their investments.

Before investing into a unit trust, investors should evaluate whether a fund’s volatility suits his or her risk appetite. They can start by reading the fund's prospectus and annual report, and compare its year-to-year performance figures. The figures can tell investors whether the fund earned most of its returns within a short period or whether its returns were achieved on a more consistent basis over time.

For example, over ten years, two funds may have gained 12% per year on average, but they may have taken drastically different routes to get there. One might have had a few years of spectacular performance and a few years of low or negative returns, while the performance of the other may have been much steadier from year to year.

Fund volatility factor

To assist investors in their fund selection, the Federation of Investment Managers Malaysia (FIMM), formerly known as the Federation of Malaysian Unit Trust Managers (FMUTM), introduced the fund volatility factor and fund volatility classification for funds with three years track record, which is assigned by Lipper.

While historical performance may not predict future returns, it can tell you how volatile a fund has been and reflect a fund manager’s track record. In using the fund volatility factor, unit trust investors should keep in mind to compare the volatility of funds against their annualised returns. In addition, they should evaluate the returns and volatility of funds within the same peer fund category and not across different categories of funds.

Apart from the fund managers’ investing style, the volatility of unit trusts differs depending on the assets that the funds are invested in. Commodities and equities are seen as more volatile compared to bonds and fixed deposits.

For equities, industry and sector factors can cause increased market volatility. For example, in the plantation sector, a major weather storm in an important plantation area can cause prices of crude palm oil to jump up. As a result, the price of palm oil-related stocks will rise accordingly.  This increased volatility affects overall markets as well as individual stocks.

There are unit trusts that invest in specific countries or regions such as China, Australia, Vietnam, and the emerging markets such as BRIC (Brazil, Russia, India and China). These funds are prone to country risks such as political risk and financial events in the country. Investors have to be aware of the volatility of foreign stocks and bonds. Regional and country-specific economic factors, such as tax and interest rate policies, also contribute to the directional change of the market and thus volatility.

Investors of a commodity fund would normally look at demand and supply conditions to access the outlook for the commodity market. In 2008, the rally in commodity prices was partly due to growing demand from energy-hungry China and other emerging countries. However, a sharp increase in speculative demand among hedge funds for selected commodities helped to drive up these commodity prices to record levels that were out of line with their fundamentals.

Following the financial crisis, hedge funds were scrutinised for their role in the speculation. Meanwhile, global demand of commodities is expected to increase in line with the economic recovery but there is no guarantee that the hedge funds will not return and create speculative demand.

In response to the financial crisis, central banks around the world have slashed interest rates to record lows to spur economic growth. However, selected regional central banks had started raising interest rates in the first half of 2010 to curb potential inflation as economic conditions improve.

In conclusion, unit trust investors can apply the ringgit-cost averaging method in a volatile market environment. This strategy would effectively reduce volatility risks as it does not time the market. Ringgit-cost averaging is most suitable for long-term investors as it requires investors to stay invested regardless of the market’s direction. For investors with higher risk appetite, they would need to understand specific factors that affect volatility in different asset classes and geographical areas and select their funds accordingly.


www.publicmutual.com.my

http://www.publicmutual.com.my/LinkClick.aspx?fileticket=KIgoaupKUnU%3d&tabid=86

Thursday 8 December 2011

How to make money in a down market?


Here is an example of making money in a down market.

At the end of 2007, an investor was enthusiastic about a stock ABC.  Then the severe bear market of 2008/2009 intervened.  Here were the investor's transactions in stock ABC.

1.11.2007  Bought 1000 units  @  $6.00          Purchase value  $6,000
6.11.2007  Bought 1000 units  @ $ 6.75          Purchase value  $6,750
15.9.2009  Bought rights 800 units @ $ 2.80    Purchase value  $2,240
!5.9.2009   Bought 5,500 units  @ $ 3.51         Purchase value  19.305

Total bought 8,300 units
Purchase value  $34,295
Average price per unit $ 4.13

Current price per unit  $ 5.51
Current value of these 8,300 units is $ 45.733.

This is a total gain of $ 11,438 or total positive return of 33.4% on the invested capital, excluding dividends, received for the investing period..


Lessons:
1.  Investing is most profitable when it is business like.
2.  Stick to companies of the highest quality and management that you can trust..
3.  Stay within your circle of competence.
4.  Invest for the long term.
5.  Generally, hope to profit from the rise in the share price.
5.  At times, the share price becomes cheap for various reasons # - be brave to dollar cost average down, provided no permanent deterioration in the fundamentals of the company..


# Severe bear market of 2008/2009.

Tuesday 1 November 2011

MIS-SELLING STOCKS: "Buying the Dip", "Averaging In" and "Buy and Hold"

Das argues that many expressions used by financial advisers are an attempt to defend bad advice. Cheekily, he puts ''buying the dip'', ''averaging in'' and ''buy and hold'' into this category.

"If you believe that shares only go one way, which is up, then every time they go down, it's a buying opportunity,'' he says. ''If a stock was good value at $10 then it must be cheap at $9 and a bargain at $8. People forget that the lowest it can go is zero."

Averaging-in, or dollar-cost-averaging, is a strategy designed to avoid trying to time the market and investing all your money at the wrong time.

The idea is that by investing small amounts regularly you buy more when prices are low and less when prices are high. Left to their own devices, most people do the opposite.

This works well in a rising market but when prices are falling you simply throw good money after bad and keep fund managers in business.

"The only way out of a hole is to stop digging," Das says.

The buy-and-hold strategy is based on the premise that if you hold a stock long enough it will make money.

This may be true for good quality stocks some of the time but it is not an excuse to nod off at the wheel. Some stocks are lemons and there are times when it pays to reduce your overall exposure to shares and invest in something that provides a better return.

"People forget that after the 1929 crash it took 25 years to recover,'' Das says. ''The Japanese market has never regained its high of 1989."