The Strategy to Navigate Volatile Markets
Two potential advanced strategies for regular savings plans
A regular savings plan (RSP) refers to a program where investors can contribute a set amount of money at regular intervals.
You may ask, "Can I buy more when the market is down?" The answer is yes, and that requires considering potential advanced strategies rather than setting investment amount and timeframe.
1. Flexible dollar-cost averaging: sell high, buy low
Flexible dollar-cost averaging is an adaption of the dollar-cost averaging for the convenience of investors, who can make better use of their money by paying attention to the average P/E ratio of the market.
If the market is down and the P/E ratio is low, investors may increase the investment amount.
If the market is up and the P/E ratio is high, investors may reduce or redeem investment.
These operations enable investors to sell high and buy low for better overall cost.
2. Value averaging: stay alert to the ever-changing market
Investors can start with a target of a fund’s market value increased by $1,000 per month and check its monthly fund amount when making an automatic investment. If the amount exceeds the target, investors redeem the excess amount. If it reaches the target, they don't need to add any more; if not, they have to add up to the target amount.
It might be easier to understand this strategy through an example.
If your target is that a fund's market value will increase by $1,000 each month and you buy a fund with $1 Net Asset Value (NAV)in January for $1,000, you might encounter the following situations.
The fund's market value does not reach the target, so you continue to contribute your money:
By February, the fund's NAV falls to $0.7, and the fund's market value is $700. You have to buy $1,300 in February to reach the target of $2,000.
By March, the fund's NAV rises back to $1, and the fund's market value is $2,857. You can buy another $143 to reach the target market value of $3,000.
The fund's market value exceeds the target, so you redeem your funds:
By April, the fund's NAV rose to $1.6, and the market value was $4,800. You should redeem the $800 that exceeds the target.
If the fund's market value is precisely the target value, there is no need to add or redeem.
*This is for illustrative purposes only and not indicative of any investment.
The basic rule of this strategy is to buy fewer shares at a higher price and more shares at a lower price.
Please note that each month's investment amount is not fixed, and sometimes the amount may be large. Investors should therefore have sufficient funds.
There are more than these two potential advanced strategies for RSP. If you find them too complicated, you may consider choosing the original dollar-cost averaging strategy.
The critical thing about an RSP is considering the right product and keeping investing.
Writing a preface to the fourth edition of The Intelligent Investor, Warren Buffett says: "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."
