Friday, April 18, 2008

Mutual Funds 3 - Entry Point & Buy Criterias (examples)

With the above options, I usually go for lump sum (if small amount say $10K or via EPF) or a combination of Dollar Cost Averaging + Value Cost Averaging (Combo). No timing of market

If I get a windfall of say $50K or more, I'd rather break it into monthly investments using Combo approach.
Reason: I do not want to be unlucky and buy totally in, then having the whole market crash on me. By breaking up the lump sum of, say $150K, and doing monthly Combo approach within 2 to 3 years, I ensure probability is on my side that I won't be too unlucky.

Most of us have heard SALES agents say out Dollar Cost Averaging (DCA) whenever they can't get their paws on our lump $um. DCA is espoused by many to be a better way than lump sum - I agree. However, there's a better way than DCA - called Value Cost Averaging (VCA). The table above shows the concept of a controlled VCA - controlled by limited monthly resources available for investment - $1,000.

There's an even better approach - a combination of DCA + VCA. I got the idea from a book by Mr. Lichello, called TwinVest and reduced it into a spreadsheet. Just input the monthly amount you can put aside for this particular investment and every month / quarter /period, enter the sales price or NAV price (must be consistent). The spreadsheet will advise how much value to purchase.

All these - DCA vs. VCA vs. TwinVest has been randomly tested against each other and also backtested with Public Index Fund's data.

90%+ of the tests, using randomly generated prices and fixed amount available per month, shows that TwinVest gets more profits or lose less than DCA or VCA.
6%+ of the tests showed VCA beating TwinVest and DCA.
Never once did DCA beat VCA or TwinVest
The randomly generated test was simulated for a period of 10 years, investing every month.

Why aren't these SALES agents advising you to use TwinVest or even VCA? Simple - it takes slightly more effort on their part to calculate OR they don't even know of these two approaches. Most would rather get all your $ (lump sum) so that they don't "lose" you to another agent (meaning losing their commission opportunity) OR put you in auto-mode of DCA via standing instructions from a bank to pay to the Fund House.

Now you know more than most SALES agents - use the knowledge well ;P.

For SALES agents reading this - add value for your prospects and customers, they WILL stay with you and appreciate your efforts. Track and give them reports "per transaction" invested with returns/loss per annum, not simple GROSS returns and AVERAGE yearly returns - give compounded per annum returns - make it simple for your customers to compare against other investments. We know not all investments make $ and that even for those that make good $ there will be ups & downs - be transparent about performance ya ;P


  1. You know...all the information here are "gold"...but presenting it this way. Hmm..may be too much to be digested at a go.

    Am still working out on the quiz thingy.

  2. Hi Wong Mun Keong,

    If I am withdrawing $40K from my EPF a/c 1 to invest, shall I invest $10K every 3 months, is this the correct 'averaging investment' way? How can apply the 'TwinVest' for my investment.


  3. @Lowyat2011, U can apply TwinVest for your withdrawals 2 ways:
    1. If U just want to withdraw $40K one lump sum and never withdraw again

    a. $40,000 / 3years to finish it off, that's $13,333.33

    b. $13,333.33 / 4qtrs per year to allocate per quarter period, that's $3,333.33

    c. Actual moving of $
    +Move your $40K to PSBF or any other EPF approved bond fund
    +Every period/qtr, move the appropriate amount, based on your TwinVest calculations (best automated on a spreadsheet

    Last but not least, please do have a "take profit exit plan" for your transactions - ie. switch back to bond from equities. Remember that TwinVest is an Entry risk management rule, it doesn't have any effective Exit rules.

    2. If U want to keep withdrawing $xxk every 3 months
    Similar to (1.) but U also move every quarter from EPF to Bond fund every quarter

    The concept is to use the bond fund as a cache of $.

  4. dear sir,
    how to get that dca vs vca vs twinvest excel file?

  5. Ding A Dong - er.. the Excel file's data was already shared as a screenshot above. There's nothing "extra" inside unless U want to see the actual Excel formulas - which can also be derived from the screenshot above :)

    Sorry ya - the original file.. i've no idea where i've put it heheh