Chapter 2 'Relief From Falling Prices" Effect

Chapter 2 'Relief From Falling Prices" Effect:

No matter how low the price falls

With DCA investing, you don't have to fear falling prices. Even if the price goes down to half its original value, that doesn't mean you'll suffer a loss. I'll explain why you can have peace of mind even in times of falling prices.  

Figure.1 : Even at half price

Here, the starting price is $10. It went down to $2 over 7 years and jumped back up 3 years later to $5. The end price is half the value of the starting price. If you had invested only once at the beginning and waited 10 years, you would have lost half your money. Now what would have happened if you had invested every month? $100 per month makes $1,200 over a year, and 10 years later you get $12,000, right? What if you invest the same amount every single month in this fund with its price movements over the investment period, what would have happened to your $12,000?  

1. $7,200 2. $9,000 or 3. $13,900  

What do you think? The correct answer is 3! Even if the fund value decreases by half, you still make a profit. That's DCA investing! If you had put the same $12,000 in the fund all at once at the beginning and waited 10 years, you would have ended up with $6,000. But you're in the black with DCA investing...do you know why?

DCA Investing Formula  

Use the formula below to help you visualize DCA investing. You'll understand all the previous answers.  

Investment Value = Amount x Price 

Investing involves ââÅ¡¬ÃƒÆ’…purchasingââÅ¡¬ a financial instrument whose value is the result of multiplying the ââÅ¡¬ÃƒÆ’…amountââÅ¡¬ you purchased by the price of that instrument. For example, if you have 100 apples at $1 each, the ââÅ¡¬ÃƒÆ’…valueââÅ¡¬ of all the apples is $1 x 100, or $100.   Normally, investments are made by focusing our attention on ââÅ¡¬ÃƒÆ’…how much it costs,ââÅ¡¬ or the ââÅ¡¬ÃƒÆ’…priceââÅ¡¬ of the financial instrument, and almost never does anyone think about the ââÅ¡¬ÃƒÆ’…amount,ââÅ¡¬ the number of units purchased. Under normal conditions when a single investment is made, the amount initially purchased does not change. Haven't you always thought about just the price when considering an investment? You probably never viewed investing from the perspective of ââÅ¡¬ÃƒÆ’…what amount should I buy?ââÅ¡¬ DCA investing entails investing on a monthly basis. The price of a mutual fund changes every month so the amount of that fund you purchase is also different depending on the price in any given month. When the price of a product you invest in is low, you can purchase many units, and when the price is high, you purchase less. Therefore, in the case we just saw, the more the price goes down, the higher the amount we can buy. Particularly when the price was at $2, its lowest point 7 years after the start of the investment period, the highest number of units of that fund was purchased. What happens later when the price goes up? The amount of units you accumulated is valued at a higher price and the value of your investment increases. For example, the value of your 100 apples bought at $1 each is $100, right? But if the price goes up to $2, then the value doubles to $200. The price of the product goes up, so the value of investment also goes up. In this case, the price was half what it was at the start. However, because a high amount was purchased over the investment period, multiplying it by that ending price would result in a profit.

Figure.1 : Even at half price

Here, the starting price is $10. It went down to $2 over 7 years and jumped back up 3 years later to $5. The end price is half the value of the starting price. If you had invested only once at the beginning and waited 10 years, you would have lost half your money. Now what would have happened if you had invested every month? $100 per month makes $1,200 over a year, and 10 years later you get $12,000, right? What if you invest the same amount every single month in this fund with its price movements over the investment period, what would have happened to your $12,000?  

1. $7,200 2. $9,000 or 3. $13,900  

What do you think? The correct answer is 3! Even if the fund value decreases by half, you still make a profit. That's DCA investing! If you had put the same $12,000 in the fund all at once at the beginning and waited 10 years, you would have ended up with $6,000. But you're in the black with DCA investing...do you know why?

DCA Investing Formula  

Use the formula below to help you visualize DCA investing. You'll understand all the previous answers.  

Investment Value = Amount x Price 

Investing involves ââÅ¡¬ÃƒÆ’…purchasingââÅ¡¬ a financial instrument whose value is the result of multiplying the ââÅ¡¬ÃƒÆ’…amountââÅ¡¬ you purchased by the price of that instrument. For example, if you have 100 apples at $1 each, the ââÅ¡¬ÃƒÆ’…valueââÅ¡¬ of all the apples is $1 x 100, or $100.   Normally, investments are made by focusing our attention on ââÅ¡¬ÃƒÆ’…how much it costs,ââÅ¡¬ or the ââÅ¡¬ÃƒÆ’…priceââÅ¡¬ of the financial instrument, and almost never does anyone think about the ââÅ¡¬ÃƒÆ’…amount,ââÅ¡¬ the number of units purchased. Under normal conditions when a single investment is made, the amount initially purchased does not change. Haven't you always thought about just the price when considering an investment? You probably never viewed investing from the perspective of ââÅ¡¬ÃƒÆ’…what amount should I buy?ââÅ¡¬ DCA investing entails investing on a monthly basis. The price of a mutual fund changes every month so the amount of that fund you purchase is also different depending on the price in any given month. When the price of a product you invest in is low, you can purchase many units, and when the price is high, you purchase less. Therefore, in the case we just saw, the more the price goes down, the higher the amount we can buy. Particularly when the price was at $2, its lowest point 7 years after the start of the investment period, the highest number of units of that fund was purchased. What happens later when the price goes up? The amount of units you accumulated is valued at a higher price and the value of your investment increases. For example, the value of your 100 apples bought at $1 each is $100, right? But if the price goes up to $2, then the value doubles to $200. The price of the product goes up, so the value of investment also goes up. In this case, the price was half what it was at the start. However, because a high amount was purchased over the investment period, multiplying it by that ending price would result in a profit.

Gambar 8: Walaupun setelah penurunan sampai Rp. 1,000

Figure.8 : Even after dipping to 10¢ 

Let's try another one. ItââÅ¡¬ÃƒÆ’¢Ã…¾¢s an extreme case. Although you won't find such a case in your actual life, think of it as part of your training to understand the investment. The starting price was $10 and 7 years later, the price plummeted to 10¢. Then 3 years later at the 10-year mark of the investment period, the price recovered to $1.20, an 88% decrease in value from start to finish. If you had invested $100 monthly in this fund with such price fluctuations, what would have happened to your total $12,000 investment?  

1. $5,300 2. $9,800 3. $14,500  

What do you think? The answer is 3! Even after losing as much as 88%, the fund provided a profit of over 20%. Let's compare that with the previous case. It's surprising that this one makes us more money than the previous one. With DCA investing, you should never think that a lower price automatically results in losses. This is very different from normal investments which are judged based only on price fluctuations. DCA investing provides a chance to purchase more when the price goes down. Subsequent increases in price would result in a handsome profit. This is an effect called ââÅ¡¬ÃƒÆ’…relief from falling pricesââÅ¡¬ not present in usual lump-sum investments. No matter how low it gets, if it recovers to some value at the end, you won't lose. With DCA investing, you'll get peace of mind no matter how low the price falls.      

DCA investing alleviates this fear and provides a relief effect when faced with falling prices. This is a huge advantage for investors.

In all things, peace of mind is top priority. When buying food, do you select dubious items just because they're cheap? Do you live in a broken down house just because the rent is low? People will most likely choose on the basis of peace of mind in all things. DCA investing provides this peace of mind.

Selanjutnya: Chapter 3 ââÅ¡¬ÃƒÆ’…Low StressââÅ¡¬ Effect