You will be able to explain how investing a fixed amount each month works and what it can and cannot promise.
A week after her first purchase, Nadia saw a post in a finance group: "Dollar-cost averaging means you can never lose money. Just keep buying every month." It had hundreds of likes. She was already planning to invest every month, so it sounded like good news. It also sounded too good.
Investing a fixed amount on a regular schedule is a sound habit, and it's the plan this module builds. But it has a precise job, and the post got that job wrong. Knowing what it does and doesn't do will stop you expecting the wrong thing from it in your first bad year.
Dollar-cost averaging means investing the same dollar amount at regular intervals, whatever the price. Because the amount is fixed, the number of units you get changes. When the price is low, your money buys more units. When it's high, it buys fewer.
Here's a made-up example over three months, with S$500 a month and no fees, to keep the arithmetic clean. In month one the fund costs S$5.00, so S$500 buys 100 units. In month two the price drops to S$4.00, and S$500 buys 125 units. In month three it's back at S$5.00, and S$500 buys 100 units again.
You've invested S$1,500 and you own 325 units. Your average cost per unit is S$1,500 divided by 325, about S$4.62. The average of the three prices was about S$4.67. Your average cost is lower than the average price, because the fixed amount automatically bought more of the cheap units. At the month-three price of S$5.00, your 325 units are worth S$1,625.
That's the mechanism. It doesn't require you to predict anything. It simply means falls in price are partly offset by buying more units while they last.
The real strength of regular investing is less about arithmetic and more about habit. Most people earn monthly and can invest monthly. A fixed amount on a fixed date turns investing into a routine, like paying a bill, instead of a decision you have to make each time.
That matters because decisions are where people go wrong. Someone who decides each month whether to invest will hesitate when prices are falling and the news is grim, which is exactly when the fixed amount buys the most units. A standing plan removes the question.
Nadia's version fits her broker's fees. She saves S$500 from each pay cheque into her bank account and buys every three months, as she decided in lesson 1.4. It's still regular investing of a fixed amount. The amount is just S$1,500 every quarter.
Here's where the post went wrong. Dollar-cost averaging does not prevent losses.
If the market falls and keeps falling for a year or two, each month's purchase is worth less than you paid, and so is everything you bought before. Buying more units at lower prices helps you recover faster when prices eventually rise. It doesn't stop your balance from falling while they don't. Someone who started investing monthly just before a long decline would see a lower balance than their total contributions for years.
It also doesn't pick a good time to buy. It spreads your purchases across good times and bad, so you avoid putting everything in at the worst moment, but you also give up putting everything in at the best one.
Regular investing from salary is one situation. Having a lump sum in hand, a bonus or savings you've decided to invest, is another.
With a lump sum, you could invest it all at once or spread it over several months. Because markets have risen more often than they've fallen over long periods, investing a lump sum straight away has often ended up ahead of spreading it out. The longer money waits in cash, the longer it misses any rise.
Here's the same made-up fund, this time rising steadily. If you put S$1,500 in at S$5.00, you'd have 300 units. Spread it over three months at S$5.00, S$5.50 and S$6.00 and you'd have about 274 units. At S$6.00, the lump sum is worth S$1,800 and the spread version about S$1,645.
The catch is emotional. Investing a lump sum the week before a fall feels terrible, and that regret makes some people sell. If spreading a lump sum over a few months is what lets you invest it at all and hold on afterwards, that's a reasonable trade. Just be clear that what you're buying is comfort, and the market risk is still all there.
Nadia invested her S$5,000 starting amount in one go in lesson 6.4. Her future S$1,500 orders come from salary. She also gets a year-end bonus, and she hasn't decided what to do with it yet.
Think about where your own investing money will come from: monthly salary, a lump sum you already have, or both. If there's a lump sum, decide now how you'll handle it, before a market headline decides for you.
Write whether you will invest from monthly salary, a lump sum, or both, and how you will handle any lump sum.
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