#56. When To Switch And When To Do Dollar Cost Averaging?

Learn When And Why To Use Either Of These Strategies

There is always a debate between investors, Unit Trust Consultants and others on which strategy to use - switching or dollar cost averaging? Even talking and discussing with Unit Trust Consultants in Kuala Lumpur, I find that everyone has their own opinions and prefer to adopt only one strategy.

There is a group that prefers to use only dollar cost averaging for their unit trust investment. They claim that the investment of unit trust is for the long term, therefore dollar cost averaging is the best strategy to bring down the cost of the unit trust fund purchase.

Now, the other group that I talk to prefers switching. They want to lock in the profits that they have gained by moving to a less volatile fund such as a bond fund.

Well, both strategies are good I would say. However, you need to know when to use either of these strategies. If you are in a fight, you can't just throw punches all the time. And you can't only kick all the time. You have to learn to use a combination of punches and kicks to make your attacks more effective!

Use both Switching and Dollar Cost Averaging!

Let's see how you can benefit from both these strategies to make the most out of your investment! If you have read books or attend seminars on investment in Malaysia, I think you will still be confused about which strategies to use because usually these two topics are discussed separately. They are never discussed together and compared against each other on when would be the best time to employ either strategies.

Switch!

From experience, I find that it's usually best to do a fund switching when the overall market is bearish (downtrend). Say you are invested in an index unit trust fund and the KLCI is going down because of the overall market sentiment, this is the best time to switch to a bond fund and lock your previous gains. If you don't switch, you will never know when the market will recover. In 1997, when the market went bearish, it took about 10 years before the market reach it's previous level. You would need a lot of money to average out your cost in a dollar cost averaging strategy. The market was really at it's bottom low hovering around 200 to 300 points in 1998. And you would have to wait around 10 years before you see profit in your investment.

By doing a switch of all my equity funds to a bond fund in 1998, I was able to see my money grow and my investment became a profitable one. Yes, I cut my losses there and did a switch. You see, I didn't have any more money to do a dollar cost averaging strategy. Switching is another great strategy for those who have no more spare cash to average out their investment. Many people I know usually dump in a lump sum and will not do any dollar cost averaging, therefore this is a strategy that will benefit them.

Dollar Cost Averaging!

When to apply a dollar cost averaging technique? You can do this if you are investing for short term, and also for long term. Huh? Short term and long term also can use this strategy?

Well, let me explain. If you are investing for short term during a bullish market, it's wise to apply a dollar cost averaging strategy. This is because in a bullish market, such as in the last 2 to 3 years in Malaysia, you can still sometimes catch a bearish trend. This is when you should put in some money to capitalise on the price drop. Buying up more units when the price drops each time will help you to gain in your short term investment. Of course, this strategy is great if you have extra cash to put in each time the market dips a bit or whenever there is a correction in the trend.

Let us talk about the long term use of dollar cost averaging. When you are investing for long term, usually it's when you won't be using those funds until you reach retirement. If you are thinking of cashing out your unit trust investment within a 5 years or 10 years period, I would still call this short to medium term.

For long term, some people think dollar cost averaging is still a good strategy. Anyway, I will still be very careful though on applying dollar cost averaging for a long term investment. Number one, you will never know when you will run out of money and need to redeem your investment. Number two, you will never know when you will be short of cash to put in for your dollar cost averaging investment. Number three, you will never know how to market will be? It can go downwards just as you hit retirement and need to cash out your unit trust fund. And then all your hard earned cash that you have invested in unit trust fund just could not give you any profit to live off your retirement. What a horrible picture.

So, only use dollar cost averaging when you are certain that the market is bullish. Based it on solid market news and research. If there is any hint of market moving downwards, be careful and monitor closely. Prepare to switch whenever the signs are more obvious.

Happy trading.