Leadership (Abuja)
Tunde Oladapo-Dixon
28 August 2008
column
Welcome to my column for this week. As it is in the stock market for a while now, investors have resulted to holding cash or rather keep their fund in a bank with the slogan "CASH IS KING"
Well cash is king in a sellers market like we are experiencing now in the stock market but still some trades are done on a daily basis, which shows that some investors are buying irrespective of the daily din and free fall of equities. Analysts all over the world says buy when it's a sellers market and sell when the market rebounds. This implies that, sell when the buyers are buying and buy when the sellers are selling. Naira cost averaging is a powerful tool to adopt in a depressed market.
For long-term investors, naira cost averaging is a powerful tool that takes much of the emotion out of investing and lets the market work for you. One of the major problems facing individual and professional investors alike is determining when to buy a particular stock or, stated another way, how to find the bottom of a price swing.
This is the time to jump in and buy, since the price should only go up from this point. The problem is that no one is consistently correct in calling this point on individual stocks and certainly not on the whole market.
If you miss this point and the stock begins to move up, you have lost some of the potential gain by not buying at the right point. As I have said in previous article, market timing is a dangerous game. How does naira Cost Averaging Works? Naira cost averaging solves this problem by eliminating the need to predict an entry point. Here's how it works. The principle is simple: Invest a fixed amount of money in the market at regular intervals (usually every payday or every month) regardless of whether the market is up or down.
If you planning your retirement with stocks, you are already using this tool. These and other defined contribution plans use the strength of naira cost averaging to build your retirement fund (like the Pension Fund Administrators). Each pay period, your employer pulls a fixed amount from your salary before taxes and deposited in one or more special accounts.
However, you can also take advantage of the power of naira cost averaging in your individual investing program. The beauty of naira cost averaging is that you buy more shares when prices are low and fewer shares when prices are higher. The result is an average cost that is better than trying to time the market with your investments. The system works because it takes the emotion and temptation to time the market out of the process. You establish an amount that is comfortable for you to invest and let the market do its thing. The system takes the decision-making elements of how much to invest and when to invest out of your hands.
The table at the end of this article shows what happens when you invest as low as N300 per month for six months in an investment that fluctuates in price.
The average market price per unit = N48/6 = N8.00. Your average cost per unit = N1, 800/255 = approximately N7.05. I have exaggerated the price fluctuation to show how naira cost averaging works because of space limitations of only showing six months worth of data. In real life, you might see this kind of experience over six years of naira cost averaging. The point of the example is you don't have to guess when to purchase shares to get a better price. Will naira cost averaging guarantee you a profit? No system can do that. However, if you buy quality investments and continue naira cost averaging over a long period, you will have a much better chance of success than trying to get in and out of the market at the right times. Naira cost averaging is a powerful tool for the individual investor who wants to buy and hold a stock for the long term. It takes the emotion out of decision-making and, over time, gets you a better price than guessing when to buy.
Dollar Cost Averaging Table
Month Amount Price Shares
1 N300 N5 60
2 N300 N10 30
3 N300 N6 50
4 N300 N12 25
5 N300 N10 30
6 N300 N5 60
Total: N1800 255
Ave. Price: N7.05
Rebalance Your Portfolio to Stay on Track: Essential for petite investor
Portfolio rebalancing is the process of bringing the different asset classes back into proper relationship following a significant change in one or more.
Portfolio rebalancing is an important part of sticking to your game plan.
For petite investors, this is not a good time, and if you are in already and could not crash out but stocked by the decline, your portfolio mix has turned red, or you don't even look at the prices of stocks any more I have a good news for you. If you have used borrowed funds with pressure to repay now or in a month or two. Make a date with me next week. There is light at the end of the tunnel
Have a great week
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