Regular Investment vs Lumpsum Investment

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Adopting an asset allocation strategy is important but not nearly as important as a consistent saving plan. By putting aside a portion of income on a regular basis, an investor would not only have a good start in achieving his or her financial goals, he or she would be able to take advantage of the dollar cost averaging effect on the investment portfolio over time. Regardless of market conditions, dollar cost averaging requires fixed amounts of money to be invested at fixed intervals, say monthly, quarterly or yearly basis. The net effect is firstly, to lower the long-term average cost of the portfolio investment and secondly, to strip off the uncertainties of the market timing and fears that usually surface during long and gloomy bear markets.


Lump-sum investment, on the other hand, requires more careful considerations, for example, if the market seems to be clearly undervalued, then lump-sum investing would make a lot of sense. On the other hand, if one is concerned that the market will fall right after investing the lump sum, then it is probably better to break up the lump sum into several tranches to be invested over a period of time. It also depends whether time is a critical factor in achieving one's financial goals; if one has a long investment time horizon, then market timing becomes less important.

It is common for investor to invest large sums of money at a go when these cash amounts are at their disposal. Therefore, it is always prudent for the lump-sum investor to adopt an asset allocation strategy in line with his or her risk profile. To illustrate, assuming investor A invested RM 100,000 and the market index was hovering at 1,500 points. It was placed entirely in equity funds without any asset allocation and market plunged 50% right after investing. The investment likewise fell by 50% to a value of RM 50,000. To go back to the original amount of RM 100,000, the investment must now make 100% profit. Investor B also invested Rm 100,000 in one fell scoop. To minimize the impact of significant losses, Investor B made a tactical move instead, to have a 20:80 asset allocation ratio, 20% in equities and 80% in money market, even though strategically, his or her asset allocation was 70% equities: 30 money market, market fell to 1,300 points and he or she made another tactical move to increase the ratio to 40 equities: 60 money market. And yet another fall to 1,100 points which saw once again Investor B tactically increasing the ratio to 70 equities: 30 money market. There is no one size-fits-all asset allocation, thus the challenge is finding a suitable asset allocation mix for the particular market condition. To guide investors, one can use dynamic asset allocation models or online asset allocation calculators.

For more info, you can find them at Bonescythe Mutual Fund, and Bonescythe Stock Watch
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