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Early Saturday morning thoughts

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When I was under training in a bank. I remember vividly that the trainer showed us a newspaper article about an ordinary looking woman who had just retired and has a lump sum of over a million dollars as retirement sum. She wasn't a manager or some high flyer, I think that she was a clerical worker but she met someone who sold her a unit trust investing in Singapore and she bought the unit trust paying a sum every month from her salary.
After 6 years, I still remember this story about an ordinary woman who worked hard but put aside a sum of money regularly into a unit trust. Why did she buy the unit trust and who told her to do it by investing a sum of money regularly each and every month?
This simple story has 3 interesting facets to it-
  • it illustrates clearly the power of compounding interest
  • it shows that dollar cost averaging is a good way to invest
  • investing in equities/unit trust is the way to overcome inflation and lously bank interest rates

This story was told to me during a training session in year 2001, just before 911. I was so inspired by it that I went out and bought a unit trust too and invested in Greater China, because I reasoned that it was like Singapore 20 years ago, when the lady bought into Singapore's future with her savings.

I thought that it was a safe time to invest as the Asia area was recovering from the financial crisis of 1997 so I should be investing at near the bottom of the growth chart. So I was pretty full of myself as I thought that the next crisis was probably far away. Then 911 came along and the shares tumbled, and the unit trust prices for Greater China also went south.

As it slowly recovered from the pits in 2001, the next few years proved to be a roller coaster ride too, when SARS hit a year later at 2003 and the shares and unit trust prices again went down.

So how did my Greater China shares do during this period? As I had taken in the lesson of dollar cost averaging and become a convert, I was continuously buying units of the Greater China fund into the double slump of both the 911 and also the SARS crisis. In my first job with a securities firm, the head honcho of the firm had preached the benefits of dollar cost averaging too, and said that the mindset of a dollar cost averaging investor should be that when market is down, the investor should be pleased because he can buy more units of the unit trust. On the flip side, when the markets are doing well and the unit trust prices are high, the mindset changes and the invester still becomes pleased, because the market value of the unit trusts is up.

So in this case, timing is taken out of the equation. Some investors swear that timing of purchases and sales is the way to make money. The dollar cost averaging method means that the investor is not stressed over when to go into the market because he or she is always investing into the market. The key is only when to exit the market. For the lady in the story, the exit is when she discovered that she is a millionaire when they sent the statement from the fund house and that she can retire.

What a way to retire :)

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