Saturday, November 6, 2010

How to invest with regular saving (with Value Averaging Method)?

If you have a positive cash flow (income less expenses less emergency fund) of less than RM1,000 per month, how do you invest such a small amount especially when it is only RM300?

Two common ways I can suggest are:-

  1. Keep it in Saving Account (and grow it to a bigger size before invest)
  2. Invest in a mutual fund on regular top up basis
Method 1
You may have a lump sum investment later but it takes 3 years to reach a significant RM10,000
With this method, you may be missing lots of good investment timing.

Method 2
Assuming you know well about how to invest "right" in mutual fund , invest regularly is actually applying dollar-cost-averaging (DCA) method i.e. you buy regardless the price is up or the price is down. DCA is a good strategy for investor with a lower risk tolerance.

However, I just learnt today that there is another method of regular-saving-investment is called "VALUE-AVERAGING" that suppose to be better as it covers the pitfalls of DCA

The key features of Value-Averaging are:
  • A more active way of investment (as compared to DCA which is more suitable for passive investing or investor with no time / knowledge about the investment)
  • Invest more when the share price falls
  • Invest less when the share price rises
Probably you can employ Value-Averaging method after you have save for 2 to 3 years under Method 1 to accumulate a lump sum.

Later, will share more about another technique in Execution called "Sum of Digits Laddering"!