Common Sense About Dollar Averaging

I wrote this when I was totally disconnected from the world. I have no idea what was happening for the last few days except I saw some nice green board a few hours ago. I feel good to be able to get back on-line(again).

Are you feeling of regrets not buying or buying on 5 March? The truth is hindsight is always 20-20. The truth is we cannot know what is tomorrow going to be. Speaking of tomorrow, tomorrow will never come because we will always have tomorrow. Trying to guess what is tomorrow like is like what Hokkien says Liak Bo Qiu (Cannot catch the ball......pardon my Malaysian English).

OK, back to business, every solution to a problem is developed to address a unique problem. One should never copy blindly without spending time to examine the relevancy and understanding of the background. Anyone wish to plug and play is as good as plug and pray. So is Dollar Averaging. Don't get angry if God don't answer your prayer.

I have posted in my previous blog saying one should consider dollar averaging to cope with current volatilities. The first question one needs to ask is how much(current and future cash inflows) am I planning to invest? Then what is the time span I am planning to invest this sum of money? You heard this before, right? I know many of my readers are sophisticated, so don't try insult their intelligence, let's make things a bit more complex.

Let's start with the second part of my question. How low do you think KLSE will go from 1310? 1250? 1200? 1150? 1100? 1000? 950? Hmmmmm...........hello are you there? I hear dead silence.

For argument sake, let's say KLCI is selling at 15 times earning at 1310, the rest of the price and PE will be 1250 at 14.3 PE, 1200 at 13.7 PE, 1150 at 13.2 PE, 1100 at 12.6 PE, 1000 at 11.5 PE and 950 at 10.9 PE, now do you think KLCI will ever be selling at 9 times PE or 6 times PE?

Aha, in the world of investing anything can happen but selling at 950 is likely…. but….. but....... you said.... probability will be quite low unless 1997/1998 history is repeating again. So we are talking about KLCI fall by 27% from 1310 to 950 in the worse case scenario. Why don’t we do ZERO dollar averaging? Meaning wait for 950 to come, but it may not come my dear. Zero dollar averaging can be done by Master Yoda, if you are not, stick to dollar averaging.

So dollar averaging will be useful because we know it is about to bottom but we don’t know enough where is the bottom. Dollar averaging strategy may not be a disaster if we are paying for something that is reasonably valued. This will take volatilities out of the equation.

I shall never ever dollar averaging on China market now is selling at 40-50 times earning! It can fall very hard when PE going to 15X, if earnings cannot catch up fast enough or sudden liquidity is available.

Don't do dollar averaging in a bubbly market, please, please, please, don’t do it! Don’t call my name ($%^&^%%!!!!**8) when you got toast ( don’t turn yourself into Char Siu – BBQ Pork – but GOLD is OK!).

Now let's get back to question 1, how much am I planning to spend? Let's say $ 10,000 in 12 months, why 12 months? Pluck from the air, assuming US recession to end in 12 months, if we are in one already. So, I plan to spend 4 installments with $ 2,500 each within 1 year with interval of 3 months. There is pretty good chance I can make average 15% return in 5 years to ride out this storm with very little risk! (see table) This is my simple prescription for investing, take two Panadols(actifast if you wish) and go to bed - no X-ray, no blood test, no Greek(Alpha, Beta, Gamma ……… Theta), no calculus, no rocket science required! Just common sense plus a peanut size of guts.

Geeez ……. I am out of job because I have no more investing secrets to blog! Hang on!!!!! For those who are wondering what happened to MUI, stay tuned, I have some points to make. So come back regularly. Thank God I still have a job! You find it funny? This what the professional investment business is all about….selling stories. BTW, I am absolutely an Amateur, just like Bobby Jones, don’t doubt that OK? You find that I am offensive? Come back tomorrow, I will show you something.