Strategies and Concepts of Basic Investing : Basic Investing Strategies Part- 3

- Continue from Part- 2 -

Strategy No.3

Currency-Cost Averaging: (Money Currency; Dollar, Ringgit etc.)

Currency-cost averaging is another practice of diversification –

The notion here is that your money buys more shares when the price is inexpensive and less when the price is high. This will lowers your overall cost and, assuming the fund's general trend line is mounting, you seize more of the benefit.

Instead of spreading your money over a group of different stocks or bonds, it diversifies your investments over time. It is natural to us to buy lots of stock when prices are rising and to stop buying them altogether when prices are on the slump.

Currency-cost averaging forces you to do the opposite

What??

 

It means you end up buying the most stock when prices are low.

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But. How does it work?

Suppose you decide to put RM400 a month into a mutual fund that invests in the stocks of large companies. Your broker or fund company can set up an account for you and the money is drawn directly from your remuneration on the same day each month.

If a share of the fund costs RM50 in June, your RM400 will buy eight shares. If the price rises to RM80 in July, you buy five shares. If the price drops to RM20 in August you buy 20 shares.

This method is not to say currency-cost averaging shields you from a falling market.

If the fund's value thumps, so will your whole investment. So, the strategy does warrant that you invest new money when prices are low so that you can enjoy the build-up when the market recovers as always does with time.

Note that the idea here is to protect yourself from putting all your money in at once and having it (the market) crash days or weeks later.

Then again, it's also true that if the market moves abruptly higher, you would have missed an opportunity but then again; due to the volatility of the market in times, the risk is worth it.