Sunday, January 4, 2009

Apply Dollar Cost Averaging in Investment Link

Investment Link plans deduct your investment units in order to pay for insurance coverages.  It was mentioned in last post that this is not good for you because it goes against the concept of Dollar Cost Averaging.

However, its actually NOT "ALL" bad.  As I mentioned before, one would really need to analyse with the real numbers and not just depend on a bare concept.  Lets look at this particular case.

Current way of deducting units is GOOD in an uptrend market.  Basically you buy more units initially and then deduct less units as the market price goes up.  However it is VERY BAD in a down trend market.

And ofcourse the insurance company HAS TO assume their investment would continously be going up when they are convincing you to buy it.  That is why they calculate the units the way they are !

You may think the insurance company should deduct the money first and then only invest to the units.  That way it would be like Dollar Cost Averaging, isn't it ?  Well ... slightly better but still NOT stable enough !

If you do that, you would just get a similar effect except it is BETTER in down trend market but WORSE during up trend.

Refer to above summary table, you can see that during up trend its better to deduct units to make payment;  However during down trend, its better to make payment first and then buy the units.  Either way, you are still widely open to market risk. 
The TRUE dollar cost averaging application in this situation is to invest your money monthly and NOT yearly !  Since the insurance company is going to deduct the insurance coverage fee monthly, there is really no reason for you to prepay your premium without interest.

In short, when you buy an investment link policy, you should set your payment mode to Monthly !  That way, it doesn't matter if the insurance company deduct the units first or pay the coverage first, you would most probably always get the same amount of investment units !

In above example, you will always get 816.39 units no matter if the market goes up or down !

This example shows that Dollar Cost Averaging is a simple concept and easy to execute but sometimes can be overlooked and become very confusing.  The 3rd part ( if ever published ) may explains why we have such confusion.  Which venture a bit into the philosophical side of Financial Planning and Human Nature.


marxy said...

I suggest this table "Calculation Example : Annual Payment RM 2,400. Monthly deduct RM 100 for insurance coverage." to be put right before paragraph "In above example, you will always get 816.39 units no matter if the market goes up or down !" sot that it's not causing bits of confusion.

Also, where do those figures like 1583.61, 1200.00, 326.47 & 571.43 come from?

Michael Tsen said...

for those who love details and numbers, can view the spreedsheet I used from this link

marxy said...

oic ... those 4 figures are the final total units acquired in 2 different ways & 2 different market trends. It makes sense and complete the picture then. Thanks.

TheCurious said...


Thanks for revealing this matter of fact. Luckily from the every beginning my investment-linked policy charges the premium to my credit card on a monthly basis and it fits into the proposed approach to do DCA. Anyway, why are there people willing to pay the premium on a yearly basis? Is there any incentive in term of cash money rebate for doing so ?

Michael Tsen said...

in traditional insurance, its better to pay annually to save the extra 'cost' of handling monthly payment.

TheCurious said...

The "cost" that you are referring to, is it "money" or "effort" ?

Michael Tsen said...


Anonymous said...

What about the premium u paid to buy into the investment fund.
If you do monthly payment your units acquired will just get lesser and lesser during uptrend.

FMUTM publication has mentioned many times that DCA is 'Not the solutions ALL THE TIME'.. One has to look at the market condition to determine whether DCA is applicable or not. That of course, only applies to those who knows how to monitor the market.

Michael Tsen said...

read here to understand when to use DCA and when not.

Michael Tsen said...

and read here for your so call 'monitor' market and buy sell during low high trend ... which is a scenario of using the right tool the wrong way ... or wrong tool the right way ...

Anonymous said...

I read your link, but I'm totally lost as to why you introduce BUY-SELL method comparing to DCA.

Monitoring Market DOES NOT mean you have to buy AND SELL and hence pay more fees. If you have 1K a month to spend on DCA.. 12K x 5%(assumming this is the charges) is all you pay as a service charge, irregardless of whether you follow DCA or you follow the market trend.. And "Monitoring" the market does not involve SELLING.. Is about aiming the right point to inject the $$.

Your post on the "buy-sell" technique is all but confusing to be honest.

Michael Tsen said...

perhaps the reason for confusion is the name "buy-sell" where you may have your own view point on that particular term; which prevent you from understanding the article. ie. read too fast and didn't reach the end. The article was recommending buy hold, NOT buy sell. This article describes ppl's nature who pre make judgement before finish reading.

Monitoring (whether to buy or to sell) is fine except according to the concept of passiveness and adopt the right system ie. DCA , you don't have to.

This one says if you can "monitor" market, you may be able to do better by buying a stock directly.

Anonymous said...

Is ok, we can agree to disagree each other. I did finish off your articles, as oppose to what you claimed.

It is so totally wrong to even introduce, discuss, or explain 'Buy-Sell' in the context of DCA...

And as per you : "you can "monitor" market, you may be able to do better by buying a stock directly.", this is even more wrong... I believe you are a genuine unit trust consultant, so I shouldn't be telling you what the difference is between buying A stock and buying An Unit Trust fund.

Michael Tsen said...

u r rite abt disagreement, u've been loving to disagree for the sake of disagreement. only in this context u may be a bit way off but then again, its your unique repeating pattern or style, don't get me wrong, like I told u before ( u won't remember ) I like it, just that I hope to see some depth some times, hopefully eventually.

quote BuySell article it says, "no matter if you really understand DCA" or not ... you should "NEVER apply Buy-Sell techniques in mutual fund". Unless u r in total disagreement with these statements, then I may have missed your point totally. do enlighten me.

The links of differences btw stock and mutual fund have already been shared with you before, both qualitative and quantitive and what we can do about them.