Dollar cost averaging is the effect of investing a fixed amount of money into a particular investment at regular intervals. Typically this would be monthly or quarterly. For example, investing AED 1,000 at the end of each month into a company’s shares.
Share prices rise and fall. So one month your AED 1,000 will buy you a certain amount of shares, and the next month, if the share price has risen, your AED 1,000 will only buy less shares. The next month, if the share price has dropped, your AED 1,000 will buy more shares again.
Thus you automatically buy more shares when prices are lower, and less shares when they are higher. This is the cost-averaging effect.

A good long-term strategy
Investing regular amounts and benefitting from dollar cost averaging is a long-term strategy. Barring adverse circumstances, it helps to gradually build up holdings of a particular investment.
Most new investors do not have large sums to invest. Typically they will have some spare cash each month to put into their investment portfolio. Dollar cost averaging is a good strategy for those just starting their investment journey

Keeping it simple
Investing regular amounts keeps things simple. Regardless of market fluctuations, you invest the same amount each month. As long as you stick to it, you will be less emotionally affected by markets going up and down. So you will be less likely to trade frequently (trying to buy and sell at the right time) as this can be rash investing.

Watch out for transaction costs
Regular and frequent investments mean more transactions, which might mean more costs eating into your returns. This is especially true for fixed transaction costs, such as a brokerage that charges you AED 20 for every transaction. If you are just starting out and only investing AED 1,000 a month, that represents a 2% transaction fee! So many investors who use dollar cost averaging prefer to stick to low-cost passively-managed index funds which charge a low percentage-based fee instead.

The concept of “Dollar Cost Averaging”

• Technique of buying a fixed  amount of a particular investment on a regular schedule, regardless of the unit price
• When prices go up, fewer units will be bought, and vice versa
• The average cost of each unit acquired will be lower than the fund’s average price over the same period.

Investing Lump sum Versus Averaging Over Time*

Assuming this market scenario

• Lump sum option: the 10,000 units at current unit price of $ 2.20 will give $ 22,000, a 10% return
• Dollar-cost averaging option: the 10,976 units at current unit price of $ 2.20 will give $ 24.147, a 21% return

*Please note that these are examples only and any potential returns set out herein are not indicative of actual returns that may be achieved in any investments that you may decide to make.

Compound interest (or compounding interest) on a deposit or loan is the interest calculated on both the initial amount plus interest accumulated from previous periods. Compound interest can be thought of as the interest on interest.

Example: If you have an initial sum of AED 100 and it earns compound interest at 2% per year (compound period = yearly):

After 1 year you will have AED 102 in total
After 2 years – AED 104.
After 3 years – AED 106.1
After 4 years – AED 108.2
After 5 years – AED 110.4
After 6 years – AED 112.6
After 7 years – AED 114.9
After 8 years – AED 117.2

Figures rounded to 1 decimal place: Note that the interest added each year is not simply AED 2 (that would be simple interest). It is more than this, because the interest earned from previous years is added to each new year’s total before the new compound interest is calculated.
So the amount added each year does not stay the same, it increases. Depending on the interest rate (in this case 2%), the total grows slowly at first, but grows faster over time. It grows faster than simple interest, which is calculated only on the initial amount.

Compound interest can significantly boost investment returns over the long term. While an AED100,000 deposit that receives 5% simple interest would earn AED50,000 in interest over 10 years, compound interest of 5% on AED100,000 would amount to AED 62,889.46 over the same period. A difference of nearly AED 13,000. Most savings accounts pay compound interest. Fixed-income deposits pay simple interest.

Compounding Periods: When calculating compound interest, the number of compounding periods makes a significant difference. The basic rule is that the higher the number of compounding periods, the greater the amount of compound interest. The most commonly used compounding schedule for savings accounts is daily.
For home mortgage loans, or credit card accounts, it is monthly. Interest on an account may be compounded daily but only credited (added to the existing balance) monthly. It is only when the interest is actually credited that it begins to earn additional interest in the account.

It is never too late to start investing!

Let the magic of compounding take care of your future

Invest  AED 200 / month for only 20 years

Total Investment – AED 48,000

• Start at age 25 and get 384% return at age 65
• Start at age 35 and get 197% return at age 65
• Start at age 45 and get 82% return at age 6

* Please note that these are examples only and any potential returns set out herein are not indicative of actual returns that may be achieved in any investments that you may decide to make.

You must have heard the old saying: don’t put all your eggs into one basket. That is diversification in a nutshell. When you diversify, you hold a wider range of investments. There is always a risk that any single one of them can suddenly have a significant loss of value. But by diversifying, it won’t affect your total investment value as much. You are spreading this risk around.

What does a well-diversified portfolio look like?

A well-diversified portfolio consists of groups of assets which are lowly or negatively correlated with each other.

Example
An investor holding a portfolio of 30 different technology stocks doesn’t have much diversity. All their portfolio is in technology.
An investor with a 30-stock portfolio covering a range of industries, bonds and real estate, has a good level of diversification. If real estate takes a dip, for example, the other asset classes may not be affected.

How can you diversify?

The two main ways to diversify your portfolio:
1. Within an asset class
An investor may only own stocks, but these could be diversified across a wide range of industries. Thus, the risk of each individual stock dropping is largely mitigated.
2. Among asset classes
This is a more diversified portfolio like in the above example, where the investor holds a mix of stocks, bonds, real estate etc.

As long as you diversify your portfolio across a broad range of industries and asset classes, you can reap most of diversification’s benefits.

At Standard Chartered, we have a broad range of investment products to diversify your portfolio, including:
• Foreign exchange and precious metals
• Fixed income solutions
• Equities
• Mutual funds
• Structured products – with exposure to currency, interest rates, bond, commodity, fund and equity markets, based on your investment profile.