KUCHING: New investors need not have a pool of cash to get started in the world of investment if they use the concept of ringgit cost averaging (RCA).
According to iMoney editor Iris Lee, ringgit cost averaging means investing a fixed amount at fixed intervals.
“For example, putting RM200 every month into your unit trust fund investment, as opposed to putting a huge sum of money into the investment fund at one go.
“Essentially, what this translates to means you end up buying more units when the unit price is low, and when the price is high, you would be buying fewer units.”
There are two strategies to RCA, Lee said. Some investors may invest 20 per cent of their monthly income religiously until they retire, while others believe in RCA a set sum of money.
“Investors consider the first strategy a sensible approach to investing because they will be committing a fixed amount of their salary every month toward their financial goals, be it retiring in the Bahamas or buying their dream five-bedroom bungalow.
“On the other hand, the rationale behind the second strategy is in hoping that market volatility would work in the investor’s favour, because they would automatically be purchasing more shares when the price is low, and fewer shares when the price is high.
“This method helps to spread out the risk factor over a period of time, and is especially useful if an investor is unsure of whether to do a bulk purchase at that point of time.”
Lee highlighted that teturns are not guaranteed with the RCA method, or with any other investment strategy for that matter.
“If the fund price of the investment units decline and do not manage to regain their standings, you could stand to make losses. However, in general, the RCA method does reduce the risk of investing all your assets at the peak of the market cycle.”
Some points to consider in order to make gains with the RCA method, Lee said, is to remember that the higher the investment amount, the longer the investment time span should be.
“If you are planning to invest a large amount, RM100,000 for instance, you may want to spread it out over a period of 36 months – or three years – making it a monthly investment of RM2,777.77.”
Diversification is also key, she added, as the RCA method alone is insufficient to minimise risks for any investor.
“You will need to diversify your investments into various categories and rebalance this basket at least once a year.
“Also, understand your investment. Even with a relatively lower risk method such as the RCA, investors should still take the time to fully understand their investments.
“And it’s important to lett go when objectives have been met. Every portfolio has its objectives. If you are investing with an objective to purchase property, you should sell off your investments once your returns are adequate for your objectives. Not selling means assuming more risks than is necessary.
“You can always commence another portfolio which adopts a similar methodology for a different objective.”
In summation, Lee called on investors not to limit yourself to just one investment strategy as different investment products, or even funds and shares, may require different methodologies.
“The RCA is far from being the perfect investment methodology. Some people are quick to dismiss it, while others use it without fail in all their investments. Making the most of the RCA method is in knowing when to use it.
“The best investment strategy, if used for the wrong purpose, will still lead to losses. It would also be wise to remember that you need not employ just one lone strategy, successful investors utilise a mix of investment approaches and consider their risk appetites and level of understanding before making their investment decision.”
Iris Lee is the editor of iMoney.my, Malaysia’s leading financial comparison website. To compare and apply for the best financial products, such as credit card, home loans and personal loans, visit www.iMoney.my