Understand Dollar Cost Averaging - Real Life Example

Shariah Fund Performance as on 21/01/2010

Source: http://www.publicmutual.com.my/application/fund/performance.aspx

KATEGORI DANA

Dana boleh dipilih mengikut objective individu.

KATEGORI DANA

Kategori dana terbahagi kepada dana ekuiti, dana seimbang, dana bon, dana pendapatan tetap dan dana pasaran wang.

Pada amnya, untuk dikategorikan sebagai dana ekuiti melambangkan bahawa bahagian lebih tinggi aset dana akandilaburkan dalam stok/saham untuk memperoleh pertumbuhan modal bagi pemegang unit, dengan pendapatan dianggap sampingan.

Dana seimbang pula, akan memberikan tumpuan terhadap mencapai keseimbangan diantara pertumbuhan modal jangka panjang dan pendapatan dengan membuat sebahagian pelaburan di dalam stok/saham (tetapi bukan kepada takat dana ekuiti), dan sebahagian di dalam sekuriti pendapatan tetap (tetapi pada takat yang kurang daripada dana bon).

Dana bon/pendapatan tetap, pula memberi penekanan ke atas pelaburan dalam sekuriti pendapatan tetap supaya mendapat dan mengagihkan pendapatan tahunan kepada pemegang unit, dengan pertumbuhan modal dianggap sampingan kepada proses pelaburan.

Dana pasaran wang membuat pelaburan, terutamanya di dalam debentur jangka pendek dan instrumen pasaran wang bagi menjamindan mengagihkan pendapatan tahunan kepada pemegang unit.

Understanding Risk

Any investment carries with it an element of risk. Therefore, prior to making any investment, prospective investors should consider the following risk factors:

1. Market Risk
Any purchase of securities will involve an element of risk, As unit trust funds principally invest in listed stocks they may be prone to changing market conditions as a result of global, regional or national economic conditions, governmental policies or political developments. Market uncertainties and fluctuations in the market caused by these uncertainties will affect the net asset value(NAV) of unit trusts which may fall or rise, thus causing the income generated by the fund to fluctuate.

2. Liquidity Risk
The various securities that are purchased by a fund may encounter liquidity risk. Liquidity risk relates to the fund’s ability to quickly and easily trade at a reasonable price, in and out of positions. Should a fund comprise a security that has become temporarily or permanently illiquid or difficult to sell, the fund manager may need to sell the security at a discount to its fair value, which eventually affects the fund’s value.

3. Management Risk
Performance of the fund depends on the experience, expertise, knowledge and investment techniques of the fund manager. Poor management of a fund can cause considerable losses to the fund, which in turn may affect the capital invested.

4. Inflation Risk
Ideally the purpose of any investment is to secure returns that are greater that the inflation rate. While a fund will constantly seek to maximize returns and exceed inflation rate, it may occasionally experience losses, which result in returns that will not keep pace with inflation in the short run.

5. Interest Risk
Fixed income securities and bonds are particularly sensitive to movements in interest rates. When interest rates rise, the value of fixed income securities and bonds fall and vice versa, thus affecting the NAV of the fund. The general interest rate of the country may affect the value of the investment even if the fund(e.g Syariah Fund) does not invest in interest bearing instruments.

Type Of Unit Trust

1. Equity Funds

An equity unit trust is the most common type of unit trust. The major portion of its assets are generally held in equities or securities of listed companies.

Equity unit trust funds are popular in Malaysia as they provide investors with exposure to the companies listed on Bursa Malaysia. The performance of the units is therefore linked to the performance of Bursa Malaysia. A rising market will normally give rise to an increase in the value of the unit and vice-versa.

There is a wide array of equity unit trusts, available in the market, ranging from funds with higher risk, higher returns to funds with lower risk, lower returns.

a. Aggressive growth funds
These funds invest generally in companies with higher capital growth potential but with associated higher risk

b.Index funds
These funds invest in a range of companies that closely match (or “track”) companies comprising a particular index.

c.International equity funds
These funds invest primarily in overseas share markets.


2. Fixed Income Funds

These funds invest mainly in Malaysian Government Securities, corporate bonds, and money market instruments such as bankers acceptance and fixed deposits. The objective of a fixed income (or bond) funds is usually to provide regular income, with less emphasis on producing capital growth for investors. It is possible, however, for fixed income funds to generate both capital gains and losses during a period of volatile interest rate.

3. Money Market Funds

Money market funds operate in a similar way to a bank account-the unit price is normally set at a fixed amount. Money market funds invest in low risk money market instruments that are in effect short-term deposits(loans) to banks and other-low risk-financial institutions, and in short-term government securities.

4. Real Estate Investment Trusts (REITS)

REITs invest in real properties, usually prominent commercial (office) properties and provide the investor with an opportunity to participate in the property market in a way which is normally impossible to the small time investor. By acquiring units in a listed REITS, however, it is possible to invest a small amount to gain exposure to the property market and have diversification in your portfolio.

5. Exchange Traded Funds (ETF)

ETF is linked unit trust fund whose investment objective is to achieve the same return as a particular market index. ETF often have low expense ratios and can be bought and sold throughout the trading day through a stockbroker, on an exchange.

6. Balanced Funds

Some investors may wish to have an investment in all the major asset classes to reduce the risk of investing in a single asset class. A balanced unit trust fund generally has a portfolio comprising equities, fixed income securities, and cash.

7. Syariah Funds

The main objective of Syariah funds is to provide an alternative avenue for investors sensitive to Syariah requirements. Syariah funds will exclude those companies involved in activities, products or services related to conventional banking, insurance and financial services, gambling, alcoholic beverages and non-halal food products.

Understand Dollar Cost Averaging - Part 2

Understand Dollar Cost Averaging - Part 1

Can one predict when is the best time to invest?

Don't Miss the Boat

Buy America. I Am.

Warren Buffet reminds investors how to behave now

Times are tough. During these chaotic times, the principals of proper portfolio management are crucial:

1. Don't sell into fear
2. Rebalance your portfolio to buy equity
3. Continue dollar cost averaging
4. Inject cash if you have it

Warren Buffet affirmed this very powerfully in the New York Times last week. Nobody explains it better:

Buy America. I Am.
By Warren E. Buffett

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I've been buying American stocks. This is my personal account I'm talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can't predict the short-term movements of the stock market. 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 turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor's best friend. It lets you buy a slice of America 's future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: "I skate to where the puck is going to be, not to where it has been."

I don't like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: "Put your mouth where your money was." Today my money and my mouth both say equities.

Source: Warren Buffet, "Buy America. I Am.", New York Times, 17th October

Opportunities in Crisis

MELABUR MELALUI EPF - PANDUAN KEPADA AHLI KELAYAKAN PELABURAN DI BAWAH PENGELUARAN PELABURAN AHLI

1.0 PENGENALAN
Mulai 1 November 2007, KWSP telah melaksanakan beberapa pembaharuan dalam SKIM KWSP secara berperingkat di bawah inisiatif strategik 'Bukan Hanya Simpanan' seperti mana yang diperuntukkan di bawah Akta KWSP 1991 (pindaan 2007). Ini termasuklah inisiatif untuk memperkenalkan Simpanan Asas bagi menentukan amaun yang layak dilaburkan oleh ahli daripada Akaun 1 di bawah Pengeluaran Pelaburan Ahli (PPA)

2.0 DEFINISI SIMPANAN ASAS
Simpanan Asas ialah satu jumlah simpanan dalam Akaun 1 yang ditetapkan mengikut umur bagi membolehkan ahli memperoleh simpanan sekurang-kurangnya RM120,000 pada umur 55 tahun. Ahli boleh melaburkan simpanan dalam Akaun 1 yang melebihi simpanan asas dalam produk dan menerusi insititusi pelaburan yang diluluskan oleh Menteri Kewangan.






3.0 SYARAT-SYARAT YANG DITETAPKAN

3.1 Mulai 1 Februari 2008 , ahli boleh melaburkan simpanan di bawah PPA tidak melebihi 20% daripada jumlah simpanan yang melebihi Simpanan Asas dalam Akaun 1.
3.2 Pelaburan ini boleh dibuat setiap 3 bulan sekali dan jumlah minimum pelaburan ialah RM1,000.00.
3.3 Jumlah Simpanan Asas dan contoh pengiraan adalah seperti di LAMPIRAN.
3.4 Syarat-syarat am prosedur di bawah Pengeluaran Pelaburan Ahli yang lain masih kekal dan tidak berubah.

Contoh pengiraan

Dollar Cost Averaging - A Technique that Drastically Reduces Market Risk - By Joshua Kennon, About.com

Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts. Many successful investors already practice without realizing it. Many others could save themselves a lot of time, effort and money by beginning a plan. In this article, you will learn the three steps to beginning a dollar cost averaging plan, look at concrete examples of how it can lower an investor’s cost basis, and discover how it reduces risk.

Dollar Cost Averaging: What is It?


Instead of investing assets in a lump sum, the investor works his way into a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over several years, providing insulation against changes in market price.

Setting Up Your Own Dollar Cost Averaging Plan


In order to begin a dollar cost averaging plan, you must do three things:

1. Decide exactly how much money you can invest each month. Make certain that you are financially capable of keeping the amount consistent; otherwise the plan will not be as effective.

2. Select an investment (index funds are particularly appropriate, but we will get to that in a moment) that you want to hold for the long term, preferably five to ten years or longer.


3. At regular intervals (weekly, monthly or quarterly works best), invest that money into the security you’ve chosen. If your broker offers it, set up an automatic withdrawal plan so the process becomes automated.

An Example of a Dollar Cost Averaging Plan


You have $15,000 you want to invest in Sprint FON common stock. The date is January 1, 2000. You have two options: you can invest the money as a lump sum now, walk away and forget about it, or you can set up a dollar cost averaging plan and ease your way into the stock. You opt for the latter and decide to invest $1,250 each quarter for three years. (See chart for math of dollar cost averaging plan.)

Had you invested your $15,000 in January 2000, you would have purchased 264.46 shares at $56.72 each. When the stock closed for the year in December of 2002 at $13.69, your holdings would only be worth $3,620!

Had you dollar cost averaged into the stock over the past three years, however, you would own 746.21 shares; at the closing price, this gives your holdings a market value of $10,216. Although still a loss, Sprint FON stock must only go up to $20.10 for you to break even, not $56.72, which would have been required without the dollar cost averaging.

To go a step further, without dollar cost averaging you would break even at $56.72. With dollar cost averaging, you would have turned a profit of $27,326 when the stock hit that price thanks to your lower cost basis ($56.72 sell price - $20.10 average cost basis = $36.62 profit x 746.21 shares = $27,326 total profit.)

Combining the Power of Dollar Cost Averaging with the Diversification of a Mutual Fund


Index funds are passively managed mutual funds that are designed to mimic the returns of benchmarks such as the S&P 500, the Dow Jones Industrial Average, etc. An investor that puts money into a fund designed to mimic the Wilshire 5000, for example, is literally going to own a fractional interest in every one of the five thousand stocks that make up that index. This instant diversification comes with the added bonus. Traditionally, management fees of passive funds are less than one-tenth those of their actively managed counterparts. Over the course of a decade, for example, this can add up to tens of thousands of dollars the investor would have paid in fees to the mutual fund company that, instead, are accruing to his or her benefit.

The dollar cost averaging component reduces market risk, while the index fund investment reduces company-specific risk. This combination can be among the best investment options for individuals looking to build up their long term wealth by having a portion of their portfolio in equities.

Table 1: Sprint FON with Dollar Cost Averaging Plan



Source: http://beginnersinvest.about.com/cs/newinvestors/a/041901a.htm

The Star - Wednesday September 24, 2008 - Are you ready for this downcycle?

The five phases of stock market cycles and where we are now

AS a result of the recent financial crisis in companies like Fannie Mae and Freddie Mac, Lehman Brothers as well as AIG, investors have been wondering whether there will be more companies affected by this crisis.

George Soros, in his book published in the early 2008 titled The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, said that “ .... the current crisis is not merely the bursting of the housing bubble. It is bigger than the periodic financial crises we have experienced in our lifetime.”

According to him, we should expect the current situation to get worse before it can get better.
Hence, investors need to prepare themselves for this downturn. Even though nobody will know exactly when the market will recover again, we must be ready when the market moves.

In order to do that, we need to understand stock market cycles and where we are now.

Stock market cycles can be divided into five phases €“ expansion, settlement, contraction, crisis and recovery.

During expansion, the overall stock market sentiment will be bullish with higher stock market volume and prices.

In every market rally, there is always a main theme. For example, the bull market in 2007 was mainly attributed to positive sentiment in the plantation sector.

During this period, we should buy stocks in the sectors that benefit from the rally. If your portfolio owned a lot of plantation stocks last year, you would benefit from the overall market rally last year. Hence, we should pick stocks that follow the market theme.

Then it will enter into settlement for some profit-taking activities. If the overall market sentiment remains bullish, it will resume its uptrend.

The bullish trend will reach a period where reality can no longer sustain the exaggerated expectations. Then the market will enter into contraction where long-term investors get very uncomfortable with the market situation.

In this period, we should sell poor fundamental stocks as well as stocks in sectors which will be seriously affected in a downtrending market.

There are still some short-term traders who may enter the market at this stage as they believe it may rebound later.

However, when the market drops further, it will enter into crisis where long-term investors as well as short-term traders are selling stocks.

Our market is currently in this phase where long-term investors as well as short-term traders are not willing to commit themselves. This is given the unsettling of the US financial crisis in companies like Lehman Brothers and AIG.

Despite the US government’s plan to rescue banks, not many analysts or fund managers are convinced that we have seen the worst.

Soros applied the theory of reflexivity to explain the current crisis.

According to him, the market participants’ misjudgements and misconceptions affect the stock market prices.

He said that later, these biased perceptions would affect both prices and the fundamentals that those prices are supposed to reflect.

When a market drops in prices, it creates fear. As a result of this fear factor, prices will drop further and later cause panic selling as the fundamentals will also be affected by lower prices. Then it will turn the investors’ perception into reality.

Soros called this a two-way reflexivity connection between perception and reality, which can give rise to initially self-reinforcing but later self-defeating.

Hence, in every stock market cycle, regardless of any stock market, while it may take a long time to reach its peak, when it drops, the drop will accelerate and be followed by panic selling.
At present, most investors will be eager to know when our market will enter into the recovery phase where the market will start to recover. It will be a mammoth job to predict the market bottom.

Nevertheless, we should consider buying some stocks whenever the market experiences panic selling like the recent global market crash on the fallout of Lehman Brothers and AIG.

According to Lauren C. Templeton and Scott Phillips in their book on Investing the Templeton Way, investors need to buy stocks whenever the market experiences panic selling.

They that we should take advantage of problems that are exaggerated in the minds of sellers because of the sellers’ near-term focus.

Even though they agree that buying into crisis may affect your portfolio performance, you will gain in the long term.

However, you need to make sure that you have enough cash to average down your purchases.
Ooi Kok Hwa is an investment adviser licensed by Securities Commission and managing partner of MRR Consulting.

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Remain Calm Through Market Turbulence

In the wake of the turbulence of stock markets in recent months, unit trust investors may be tempted to either sell or buy. However, investors are advised to remain calm and practise dollar cost averaging with their long-term goals in view.

When regional and global markets succumbed to panic selling in August 2007 and more recently in January 2008, the severity and sharpness of the correction was large enough to make unit trust investors ask themselves whether they should redeem now to stem further losses or buy more units at currently low prices. In fact, if they practise dollar cost averaging, they need not concern themselves with these timing issues. Dollar cost averaging enables investors to automatically buy more units when prices fall and fewer units when prices rise.

It is especially during times of market volatility that individual investors should remain focused on their long-term investment goals and keep their emotions from influencing their investment decisions. A disciplined and methodical approach to investing is the key to long-term investment success.

Unit trust investors are advised to buy and hold their investments for the medium to long term. The buy-and-hold principle is based on the notion that a good investment will generate reasonably attractive returns over the medium to long term. This also means that investors are able to distinguish between daily movements in the market and the underlying long-term value of their investments. Professional fund managers buy and hold for the medium to long term as they are prepared to wait patiently over several years for their investments to reach their intrinsic or fair values. For the unit trust investor, the 'buy-and-hold' strategy can also be applied by holding on to a well-selected unit trust fund over a period of at least three years.

There are some investors who believe they can achieve superior returns by timing the purchase and redemption of equity funds to profit from the stockmarket's short-term movements. These investors are tempted to engage in timing the market especially in an environment where equity markets are volatile. Such investors who wish to make quick gains in the stock market by switching from one fund into another fund will often be disappointed. Market timing strategies that are often recommended by 'investment experts' have seldom been successful. This is because stock markets are inherently volatile and are impossible to predict with numerous factors, both domestic and foreign, affecting daily and weekly fluctuations in stock prices.

Investors who wish to take a more active approach with their investments by timing the market will expose themselves to many risks. In order to profit from the market's short-term trends, the investor has to correctly predict the market's trend and its turning points.

Without the appropriate skills to discern signals and time the entries and exits, the market timer may not only miss opportunities, but also potentially suffer the blow of rapid losses. Also with a higher frequency of fund switching, investors will have to incur increased transaction costs.

Investors who are concerned about market volatility are advised to practise dollar cost averaging as this strategy enables investors to focus on the long-term investment goal and not worry about the prevailing level of the market. Dollar cost averaging is simply investing a fixed amount of money in a financial asset (such as a unit trust fund) on a regular basis (monthly, quarterly, biannual) regardless of the market cycle. By investing a fixed amount on a regular basis, investors will buy more units when the market is lower and fewer units when the market is higher. This strategy will produce a lower average cost of investment than the average market price over any given period.

In addition, investors are also advised to rebalance their portfolios regularly at least once a year to ensure that their portfolio allocation reflects their investment objectives and risk profile. Thus if, as a result of an uptrend in stock prices, an investor's equity exposure has exceeded a level consistent with his risk tolerance, he can trim a portion of the equity funds and switch into bond or money market funds to rebalance the asset allocation accordingly. Maintaining a target asset allocation reduces the risk that the portfolio becomes too concentrated in a single asset class.

In conclusion, unit trust investors should always focus on achieving their medium to long-term investment goals. The practice of dollar cost averaging and regular portfolio rebalancing are effective tools that help investors remain focused on the long term horizon and prevent them from over-reacting to short-term movements of the stockmarket.

Source: http://www.publicmutual.com.my