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Investment Concepts: Value Cost Averaging (also called Dollar Cost Averaging)

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I was talking to my mom one day about the performance of our joint mutual funds when she lamented the fact that a particular mutual fund that she has gotten was doing very poorly. I asked her for more details and she started telling me that she was very unlucky that the net asset value per share (NAVPS) when she came in was quite high. I proceeded to gently chide her on her poor investment strategy and to tell her to scold her agent for not knowing any better.

You see, this is a perfect example of why statements like "I want to invest in mutual funds or a stock market index fund but I don't know when is a good time"  are fundamentally flawed. It makes the assumption that the only way to go in is in one big shot. This is not only ill-advised since it exposes you to a big risk of timing the investment just right but it also perpetuates this myth that you need a lot of money to start investing in these kinds of funds. Especially for risk-averse investors like my mom, a good practice is to do your research on the opening requirements of the various investment instruments that are available and their subsequent minimum additional contribution and work with a  budget that is comfortable for your cash flow and consistent with your goals. Some people divide their funds to be invested into 6 or more portions and try to spread out the contributions in 6 months or more to average out the risk. The best way, of course, is to make it a habit of setting aside money every month for your investment. If the amount does not fit in the minimum requirement for additional investment then set it aside in a bank account and place it in the investment when it reaches that threshold amount (every other month, quarterly, for example). The key thing is that you set aside a regular amount and identify it for investment.

This method works best for mutual funds, stock market index funds, and UITFs. The kind of investment instrument you invest in should reflect your risk/reward appetite. There are questionnaires available online to find out what kind of investor you are. This strategy can be used when investing in the stock market but only to a certain extent. For one thing, each trade in the stock market will have a commission and other fees usually on a per trade basis. That means that buying too small of an incremental amount might mean higher fees in the long run. Another thing is that most equities have more volatility in the share price and this method is oftentimes used for investments that have proven to have steady growth (like bluechip stocks for example).

While there is no one sure method of investing, value cost averaging at least minimizer the risk of going in at a bad time since it averages out the ups and downs in price compared to investing a lump sum. At the end of the day, make sure that you have done your homework on what best suits your risk appetite and investment horizon.

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