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PRUlink Investment Tutor
A Bimonthly Publication of PT Prudential Life Assurance
May 2012
Benefits of a regular savings strategy
Whether one has been saving for many years or is just getting started, there is one factor that should not be
overlooked. Inflation1 erodes the value of money. So a US$1,000 today will not buy one the same number of items
in the future. How much less will it buy? That depends on how quickly the prices of goods rise. To combat inflation,
one should invest to earn a higher return. Bank deposits are not a preferable alternative in today’s low interest
environment.
Investments strategies for today
Herein lies the dilemma - how should one go about
investing? An investor will have to decide his/her risk
profile before choosing the right investment strategy.
Some may prefer lump sum investments while others
are more comfortable with regular contributions.
Each strategy has its pros and cons. There is no one
perfect investment strategy. But in this publication,
we have chosen to talk about a regular investment plan,
also known as the dollar cost averaging strategy.
Improve your retirement prospects
Dollar cost averaging is one way
Dollar cost averaging requires one to place a fixed amount of money into a given investment on a regular basis
regardless of the state of the market. Today’s uncertain, volatile environment presents a perfect time to adopt
a regular savings plan via dollar cost averaging. As no one can predict when a sustained rally will begin, it is tempting
to lock away good value investments in a prudent, measured way. Such a strategy has many benefits.
Removes uncertainty of market timing
Dollar cost averaging takes the guesswork out of the investment process.
First, it eliminates the issue of “market timing”. We all want to buy low and sell
high – usually within a few days of buying. But we also know that it is a difficult task.
With dollar cost averaging, an investor's returns will be determined more by the overall
market trends in a given stock as opposed to the investor's specific entry price.
Smaller capital outlays
A regular savings program reduces an investor's cost base on securities that decline in
value. When the price of an investment falls, the investor purchases more units for
the same money thus lowering his/her average cost price. When the market rallies,
he/she will thus move into profits sooner. And if affordability is a major deterrent, then
it is worth to highlight that the initial and subsequent outlays in a dollar cost averaging
plan are lower than a lump sum payment for the same future “nest egg2”.
1
2
Rise in the prices of goods and services – in other words, too much money chasing too few goods.
Assets put aside for a person’s retirement. Such assets are usually invested conservatively to provide retiree with a secure standard of living for the rest of his
or her life.
Page 1 of 3
PRUlink Investment Tutor
A Bimonthly Publication of PT Prudential Life Assurance
May 2012
An example3 of dollar cost averaging
Let us take two investors, “Eddy” and “Susanne”. They decide to invest in the same investment fund at the same
time. “Eddy” is a bit of a risk taker who thinks the price of the fund will move higher. “Susanne” prefers a more
cautious approach. They both invest the same amount of money, US$1,200, with the same 12-month investment
horizon. While “Eddy” does it in one go, “Susanne” decides to invest it in regular monthly installments. Look at the
different returns!
Situation A: Declining market (start at the first dealing date of January 2008 in Indonesian market)
"Eddy"
Lump Sum
"Susanne"
Dollar Cost
Total
Investment
Outlay
Total No.
of Unit
Total
Investment end
of period
(12 months)
Net Loss
$1,200
762
$638
-47%
$1,200
1,034
$865
-28%
In a declining market, “Eddy”
is worse off, losing $562
compared to “Susanne” losses
of $335.
Situation B: Declining then rising market (start at the last dealing date of August 2008 in Indonesian market)
"Eddy"
Lump Sum
"Susanne"
Dollar Cost
Total
Investment
Outlay
Total No.
of Unit
Total
Investment end
of period
(12 months)
Net Gain
$1,200
964
$1,372
14%
$1,200
1,305
$1,857
55%
"Eddy" gained $172.
“Susanne” made a profit of
$657. The better net position
favoured “Susanne” who
dollar cost averaged.
While dollar cost averaging can deliver good long-term returns, one can also achieve higher returns by bottom
picking if one gets one’s timing right – but it can be a higher risk investment strategy. To achieve this consistently is
not easy. Few do.
As illustrated in latter table, during bear rally market, both strategies will be loss making. But more importantly, the
dollar cost investor will break even much faster than the lump sum investor. And the dollar cost investor is not only
down less but also generates a return of 55%.
All said, a regular savings plan takes a lot of the uncertainty out of investing. A good night’s sleep and peace of mind
cannot be measured in dollar terms.
3
For illustrative purposes only based on publication of Eastspring Investments (Singapore) limited.
Not intended to represent or predict the future performance.
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PRUlink Investment Tutor
A Bimonthly Publication of PT Prudential Life Assurance
May 2012
DISCLAIMER
This newsletter is solely for information and private circulation to any clients and potential clients of PT Prudential Life Assurance (Prudential
Indonesia). This newsletter may not be published, circulated, reproduced or distributed in whole or part to any other person without the prior
written consent of Prudential Indonesia.
The information provided herein is not an offer or solicitation to purchase or sell any securities, options, futures, or other derivatives related to
securities in any jurisdiction. You should obtain advice from a qualified expert before making any investment decision. This newsletter is not
investment advice and does not take into account the investment objectives, financial situation or particular needs of any recipient. Prudential
Indonesia is directly or indirectly not responsible for any losses or damages caused or alleged to have been caused a result of your reliance on
the information contained in this newsletter. Prudential Indonesia and/or any of affiliates including its officers, directors and employees may
own or have positions in any investment(s) mentioned herein or related thereto and may, from time to time add to, or dispose of, any such
investment(s).
Past performance or any forecast is not necessarily indicative of future or likely performance. The value of investments contained herein may
go up or down.
Prudential Indonesia is a subsidiary of Prudential plc, a leading international services group from the United Kingdom. As of 31 December
2011, Group Prudential has £ 351 billion (Rp 4.946 trilion) of fund under management. Prudential Indonesia and Prudential plc does not have
any affliation with Prudential Financial Inc, a company operating in the United States.
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