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Let us look at a hypothetical example. Mr. A has been buying share X regularly
with a constant amount of RM200 on a monthly basis since January 1997. Meanwhile,
Mr.B invests irregularly on the basis of market tips and he dumped all his savings
on the same share X early in March on expectation that the share would double in
value two months later (refer to Table 1 for details).
*Amount in RM
At the end of the day, by using dollar cost averaging, Mr A managed to break even despite the sharp market downturn. Mr.B who made a lump sum of RM1200 investment in March, a period when the market was bullish, suffered a greater loss of RM400 as his investment cost is much higher.
The average cost for Mr. A is lesser because he bought relatively more shares at the lower prices. Nevertheless, the method is not without criticism - it is harder to make continued purchases if the price continue to fall.
However, will the fundamentally-sound KLSE continues to fall? In addition, long term investors like Mr. A may find the conservative method useful in accumulating assets for retirement or other purposes. History shows that well-diversified long-term investments are more profitable.
Remember that any security of fund that you buy today will only grow over the long-term regardless of the buying price. Buying at a lower cost is definitely an added advantage. So rather than panic now should be your chance to pick up "potentials" while the prices are low.
You should follow the dollar-cost averaging method particularly if you are a conservative investor and have long term vision. But you should remember that the method does not guarantee the return of your investment - something that most investors do not understand.
If the shares that bought continue to slide consistently, you will still lose money particularly if the stocks you bought are not supported by strong fundamentals. If the stock that you bought is fundamentally sound, the lose will not be as much as if you had purchased the stock at one lump sum just before the share started to skid. Thus, always be a long term and fundamental-driven investor. Betting on rumours may not always work.