In mutual fund investing, sometimes the question is not “When should I buy?” but “How should I buy?”
The answer lies in a simple but effective investment strategy: Dollar Cost Averaging (DCA).
DCA is an investing strategy at its core that’s about “slowly” and “consistently over the long term”.
For instance: Instead of investing the whole 40 million VND at once, you regularly invest 8 million VND per month for 5 months.
This approach is very much in line with the philosophy of Warren Buffett, the world’s most successful investor. He once advised, “Invest regularly. Invest when the market is up and when the market is down. The most important thing is to keep investing.”
For a specific example, in 1988, Warren Buffett started buying Coca-Cola stocks, and since then, he’s been consistently buying these stocks over a long period of time. Initially, these shares were priced around 2.45 USD per stock, but their value has significantly increased over the subsequent years (currently around 60 USD/share).
The magic of the DCA method is that you should not worry too much about buying at the “right” or “wrong” time, but rather you will set a certain amount of money to invest every week or every month in the same investment product, regardless of the market price.
You will make more money, if you invest regularly every week and month, rather than being haunted by the timing of investment.
For instance: You decide to invest 3 million VND each month into a mutual fund.
The first month, the mutual fund price is 15,000 VND – you buy 200 units.
The next month, the price drops to 10,000 VND – you buy an additional 300 units.
Now, you own 500 units of the mutual fund, with an average price of 12,000 VND.
The third month, the market recovers, the price goes up to 20,000 VND. The value of your mutual fund goes up to 10 million VND.
Suppose you bought all 6 million in the first month, then in the third month, you only have 8 million, so you earn 2 million less than DCA!
In this example, you can see that the traditional investment method yields much lower returns than DCA!
The DCA method is especially suitable for those who don’t have much capital.
When you have little capital for investing, this method helps you split the amount of money to invest each week, each month.
This helps you not to be afraid of buying at too high a price and keeps your mentality stable in the face of market fluctuations.
When should you start DCA?
The short answer: The sooner, the better.
In 2022, the year the stock market plummeted, the market is now in a sideways phase, meaning there is no clear upward or downward trend, so the sooner you DCA, the more opportunities you have to buy at a good price before the market recovers.
Imagine, if you invest 5 million VND each month, after one year you will have invested a total of 60 million VND. But if you start a year earlier, the amount you have invested is already 120. The more you have invested, the more profits you will have when the market recovers.
Even, when the market is currently down like now, the sooner you DCA, the more chance you have to buy more mutual fund units at a low price.
Suppose you invest 5 million VND each month into a specific mutual fund. This month, the price of that mutual fund is 20,000 VND, meaning you buy 250 units.
The next month, the price drops to 10,000 VND, and you invest another 5 million and buy an additional 500 units. Now, you own 750 units with an average price of 13,333 VND per unit, lower than the initial price.
However, DCA doesn’t always bring benefits.
If you choose a poor stock or mutual fund that only decreases and never increases again, then even with DCA, you will still lose. This is what happened to many investors in the cryptocurrency market.
Therefore, the key to successful DCA is choosing a truly good company or mutual fund with long-term growth potential.
Here’s a list of the Top 5 mutual funds with the highest average returns over the past 3 years in Vietnam.
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