A Personal Finance Blog for Malaysian: How to invest with regular saving (with Value Averaging Method)?

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"!

5 comments:

  1. I don't know about this term "value averaging" but I have been using this method all the while. Thanks for the sharing. :)

    ReplyDelete
  2. Ha ha.. One of the thing I learn by spending RM390 and 2 1/2 days to learn it.

    Well, I should say I invest (on myself) RM390 to learn how to invest more effectively and efficiently.

    ReplyDelete
  3. Hi Chong,

    Can you advice more on "Sum of Digits Laddering"?

    Thank you.

    ReplyDelete
  4. Hi Phang,

    Sum of Digits Laddering. Basically it is about averaging up or averaging down.

    If I have 10,000 shares in Amway and price seem good to sell, I will sell 1,000 @ 8.80 and if price keep goes up, I will sell 2,000 @ 9.00 and 3,000 @ 9.30 and finally 4,000 @ 9.50.

    This method requires skill and training (i.e. experience).

    If price does not move up, I will keep the balance.

    If price move up, my average selling price will be higher than as compared to if I sell all 10,000 shares at lowest point.

    Same theory applies to buying.

    I am still practising....

    ReplyDelete
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    ReplyDelete