Been a week since I have last posted, to my readers here, my sincere apologies as I was preparing to get my papers in General Insurance done. Luckily for me, I was able to clear the Basic Insurance Concepts and Principles (BCP) and Personal General Insurance (PGI) in one sitting!
What this mean is that I can recommend other range of products (Motor insurance, especially) on top of the usual life insurance products. 🙂
Beside that, I have been consulting a few clients in the area of investment and was able to convince them on the importance of Dollar Cost Averaging (DCA) in today’s kind of market (down, down, down and hoping for a up soon?).
So are you using this concept to your advantage or are you still scratching your head over the meaning and significance of Dollar Cost Averaging? I hope to clear this with this post.
The Meaning Of Dollar Cost Averaging
To explain the meaning of Dollar Cost Averaging to my clients, I will always explain in simple terms like when prices are low, you buy more units; when prices are high, you buy less units. With this kind of constant buying, you bring down or average the value of prices down, e.g. Price of $5 and Price of $3, the average is $4 now and when the market is at $4.50, you are already in profit of $0.50 per unit share.
If this is still confusing to you, then think of this “Fish-Ball” concept:
Imagine that you like to buy fish ball every month and is willing to set aside only $1 per month to buy. The current price for a fish ball is also at $1 each. Therefore with your $1, you can buy only 1 fish ball.
Therefore your $1 = 1 fish ball
But suddenly due to an economy downturn, the prices of everything start going down and your $1 fish ball is now $0.50 each. Whereas with your usual $1, you can get more fish balls like in this case:
Your $1 = 2 fish ball (at $0.50 each), so total invested is $2 for 3 fish balls
When the economy starts picking up, your $0.50 fish ball is restored back to $1 each.
So you $1 = 1 fish ball, so the total invested amount is $3 for 4 fish balls.
If you are to sell off your 4 fish balls at $1 each (please disregard the acutal possibility of selling fish balls at your own accord), your actual return from this sale is $4. From the initial investment of $3, you have made a profit of $1 ($4 – $3).
If you are clear about this fish ball concept, you are slowly grasping the real meaning of the benefits behind Dollar Cost Averaging.
With this in mind, will you like to take a personal test to see if you are ready to tap on the concept of Dollar Cost Averaging to help you make your money work harder?
There are three graphs that are very typical of an investment chart below:
Take your pick and decide for yourself, in which investment chart will you be able to fully utilize the concept of dollar cost averaging and make your monthly saving work to the full benefit?
If you like, you can work it out on your own, based on $100 per month, for a full 12 months, prices varying (you can click on the image to get the different prices), and based on your total investment, how much returns will you be getting. If you are ready to for the answer… read on..