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STRATEGY | JULY 1998 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Investor's Tip: Play the Average With this technique, you can reduce your risk, build better investment habits, and maybe even make some money By TIM MORRISON
For those who want to invest but don't want to dump all their money at once into a volatile and sliding market, there is an answer: dollar-cost averaging. It's a simple concept. You pick a stock or fund, and invest a fixed amount, at regular intervals--say, once a month--rain or shine. Not only does this reduce the amount of money you're risking at any one time, but it also improves the quality of your investments and your behavior as an investor. "The main advantage of dollar-cost averaging is that it builds very good investment habits," says Selina Chong, Director of Retail Marketing at Fidelity Investments in Hong Kong. Rather than relying on market timing--trying to guess when and how far prices will go up and down--dollar-cost averaging allows investors to build their investment slowly without impulse-buying. "One can't say, 'Let me wait until the market gets to its lowest point,'" says Elsa Pau, a certified financial planner at the Alan Perkins Group, a financial consultancy based in Hong Kong. "How do you know when the market is at its lowest?" She notes that Bangkok's SET Index, once trading up in the 800's, is now down around 290. "The index is almost close to where it was when it started [at 100], so there's limited downside risk. But, you have to watch very carefully if it's going to be a short-term slump or a sustainable correction." In other words, how much longer do you think the market is going to languish? And how much money are you willing to bet on that conviction? With dollar-cost averaging, you don't need to address these questions. If you stick to investing like clockwork, dollar-cost averaging keeps you from selling at a low and missing a huge opportunity or--what is more common--impulsively buying in at a high and watching your investment plummet. For an example of this, TIME MONEY looked at the Asian markets of the past year or so, and how a dollar-cost averaging investor would have done. "How it works" (see opposite page) shows a hypothetical investor making regular deposits into a Manulife Index Hong Kong Fund (which invests in and tracks the performance of companies in the FT/S&P Hong Kong, China market index) from January to December 1997. By sticking to a dollar-cost averaging strategy, the investor would have avoided buying a large number of shares in the euphoric midsummer months before the index hit its high and dropped like a stone. You'll notice, though, that this table shows that dollar-cost averaging is not a magic bullet: in absolute terms, the investor still lost money in the plunge. "With regular savings it's a good idea not to start at the top," notes Campion. "In falling markets in general, you'll do better over the next five or 10 years in a regular investment program if you start now than you would have even three months ago." Look at "Why it's better" (opposite): In the up-and-down market of January to December, a dollar-cost averaging investor would have done better, if only marginally, than someone who had put down a lump sum in January and let it ride. And for the year ending this May, he would have done significantly better. By making sure that your regular investments are in regular amounts, you capitalize on the other important benefit of dollar-cost averaging: Your fixed investment will buy fewer shares at high prices and more shares at lower prices. Our hypothetical investor came away with 88.91 shares at July's record share price of US$1.12; the same investment bought 141.96 shares in December's slump and 100.52 in January. The dollar-cost averaging investor's average share price comes out to be lower than the average share price on the fund for the year. Remember: if you buy low, you have to stay with it to sell high. "The regular savings investor really has to know himself, his investment needs, and what his time-frame is," says Angela Tan, assistant manager at Nicholas-Applegate Securities Asia in Singapore. Most experts agree that 5 years is a minimum to get the full benefit of an equity investment. Now that the investment game has changed in Asia, it's becoming easier to get into these kinds of plans: In June, for example, the Monetary Authority of Singapore repealed its regulations on minimum investments in mutual funds, allowing fund managers to decide the number. Investors can now start with as little as $600, and their monthly investments are down to $30. And "ringgit-cost" averaging is being recommended to investors in Malaysia (See "Starting a Business in Tough Times," page 20). With most regular investment plans, you can have your monthly contribution deducted directly from your savings account. "It's the easiest and most painless way to invest," says Tan. To help get the ball rolling, TIME MONEY has provided some top mutual fund picks for regular investors. We asked Lipper Analytical Services to analyze all funds registered for sale in Hong Kong which offer savings programs; then we screened the nearly 200 funds to include only global equity funds, which offer diversified risks and comfortable returns. The ten best are featured at left. Still not convinced? CDA/Wiesenberger, a U.S. firm that tracks mutual fund performance, completed a study last year that compared the performance of a dollar-cost averaging investment to a market-timing computer that tracked stock data and automatically took advantage of market trends. The result: After 11 years, the two accounts had each accumulated over $90,000, with the dollar-cost averaged investment doing better by about $800. The lesson: Over the long term, a market timer would have trouble beating a dollar-cost averager. And there's nothing average about that.
HOW IT WORKS By investing a regular amount over time, dollar-cost averaging allows you to buy fewer shares when the price is high and more when the price is low. Investment in Manulife
Total invested -- $1,200 Total shares purchased -- 1314.23 Investor's avg. cost per share -- $0.91 Year-end value -- $925.75 [1]Price on last day of the month. WHY IT'S BETTER Dollar-cost averaging spreads the risk of your investment in volatile periods; invest all your money at once and you could lose big in a down market. Results for buy-and-hold investor vs. dollar-cost averaging
Sources for table: Lipper Analytical Services Asia
Corp., TIME MONEY Research
10 FUNDS THAT MAKE IT EASY
Prices as of May 31, 1998. Source: Lipper Analytical Services
Asia Corp.
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time-webmaster@pathfinder.com |
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s is becoming more apparent with every headline and closing
price, the boom days of the Asian markets are gone. And who knows
when they will return? "There are problems in the Asian economies
which we don't see disappearing any time soon," says James
Campion, Assistant Director of Unit Trusts for Schroder
Investment Management in Hong Kong. Average investors have seen
their profits crash within the space of a year, and many are
becoming increasingly wary of putting their money into
investments whose ups and downs no longer seem to make sense.
Says Campion, "If your local market goes down as much as this one
has, it's not surprising to see investors scared off."