Understanding Your Investment Method

How to choose the investment method which relevant for you? Your investment will give you better return if you can choose the best time to buy and sell your investment asset. But, this method which known as market timing is not the simple thing. There is any difficulty in choosing the right time for investing. For example, you think that the stock price in yesterday is very cheap because it has dropped 5 %, then you buy it. But today the stock price is drop again till 10%, and you disappointed why you don’t buy it just today, while you has invested your entire asset.
To solve this problem, you should using investing method of cost averaging. Cost averaging is doing investment regularly and periodically without considering economic and market condition. So, you have no worry if the price of daily needs is increasing while the stock prices are decreasing. With using cost averaging method, you invest with stable amount regularly each month. So you can get lower average of your investment initial amount

Why is it can be happened? Because when the price is up, your holding in an investment will be fewer, while when the price is down, then your holding will has much. If it is averaged, you will get lower buying price. With the tendency of the investment which will grow in long term period, of course you will get profit with this method.
For understanding this further, let’s see the illustration below:
For example, you invest with cost averaging method in stock X for amount USD 50 in the 3rd day each month along 5 months continously. With the changing price in every day, you get the investment illustration below ( with the assumption you buy the stock X per unit)
Month Investment Value (USD) Buying Price Holding Amount (unit)
Feb 50 0.20 250
Mar 50 0.21 238
Apr 50 0.17 294
May 50 0.18 278
Jun 50 0.22 227
Jul 0.23
TOTAL 250 1287

From your investment result, you can get average buying price for amount 0.1942 (0.2+0.21+0.17+0.18+0.22+0.23/5) with stock X unit you hold about 1287 units. Then if you sell all of yor stock units in July, you will gain (0.23 X 1287) – 250 = USD 46,01
Now let’s compare if you invest directly (lump sum) USD 250 in February, you will get buying price for 0.2/unit with holding unit only 1250, then if you sell all of your stock units in July, you will only get the gain for USD 37,50 (0.23X1250)-USD 250.
You have to remember that doing cost averaging method is not guarantee the higher profit you will get compared with other method. With doing market timing, for example you invest all of your USD 250, you will get buying price for 0.17/unit with the holding amount for 1470. If you sell all of yours in July you will get higher profit. (0.23 X 1470) – 250 = USD 88.10. But as explained before, doing market timing not a simple thing, because you could feel that th e right time for market timing is February not April.
Therefore, the cost averaging method is very recommended for long term period, mainly in fluctuating market like stock market, because it can reduce your investment risk