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New Straits Times

MONEY THOUGHTS: Harness this logical long-term wealth-building strategy

IN case you haven't noticed, even without raising our respective lifestyles, we generally need more money each passing year to buy the same amount of "stuff", which economists refer to as goods and services. The reason for this consistent phenomenon of rising prices is inflation. Do yourself a favour and make no mistake about: 1. Inflation's existence; and 2. It's inexorable capacity to erode our money's purchasing power. According to the winner of the 1976 Nobel Prize in economics Milton Friedman, "Inflation is caused by too much money chasing after too few goods." Although this Sunday's Money Thoughts column is, surprisingly, not primarily about inflation, I introduced it here at the start of this piece to pile-drive home the foundational reasons anyone opts to invest, ideally over the bulk of a lifetime. We invest to TRY and grow some of our money faster than inflation, and taxes erode its purchasing power over the course of years and decades. The key differences between saving and investing are the levels of their targeted growth rates or yields, and, frankly, the stability of their price trajectories over time. Both are important, but for different reasons. SAVING AND INVESTING Savings stabilise our finances and, therefore, our emotions, as well. Investments, as mentioned above, are aimed at growing our money faster than inflation and taxes. (Those points are crucial enough to warrant repetition). Whenever I'm asked at one of my financial planning workshops or retirement funding seminars which is more important, saving or investing, I reply with a question of my own: For the human body, which is more important, our liver or our kidneys? The answer, obviously, is that we need both sets of organs to live well in a biological sense. Similarly, we need both disciplines, saving and investing, to thrive financially. We save money using cash repositories or instruments like piggy banks, envelopes, bank accounts and pure money market funds. And we invest in asset classes like fixed income, equities, investment real estate, and alternative investments (AI). Our savings grow slowly and steadily with no intermediate valuation dips. Our investments, on the other hand, fluctuate (up and down) over time; however, if they are successful over the long haul, they will rise in value faster than inflation and taxes erode the purchasing power of our money. Now please think for a moment about the price gyrations that go hand-in-hand with investing... Wouldn't it be amazing if we could — somehow, some way — harness that price volatility to further beef up our total investment returns? DOLLAR-COST AVERAGING Thankfully, there is just such a strategy. It's called dollar-cost averaging, and is often abbreviated to DCA. As I've written before, for DCA to work well, five criteria must be met when we embark upon a DCA-fuelled investment strategy. They are: 1. Only buy high quality assets — not rubbishy speculative ones; 2. Only buy assets that fluctuate in price — such price fluctuations give us the opportunity to buy more investments when prices are low and less when prices are high; 3. Use equal amounts of money — a key part of this discipline is to maintain an equal series of cash outlays; 4. Injected into those investments at equal time intervals — so that there is no element of pointlessly trying to time the market; and 5. Stay the course regardless of market conditions — which boils down to committing to this powerful wealth-building DCA strategy over the long haul, for a minimum of seven years, although time horizons in the 10- to 50-year range have a much higher probability of success. If you've never invested in such a manner, here's a suggested example for illustrative purposes: Criteria 1 and 2: Pick a high-quality stock or unit trust fund or entire fund portfolio; Criteria 3 and 4: Decide to set aside a fixed sum you can afford, say RM1,000 or RM3,000 or RM10,000, or any other RM amount — less or more or somewhere in between my suggested amounts — that suits your budget, and then regularly inject your selected amount at a convenient interval, such as once a month or a quarter; and Criterion 5: Stay the course and don't bail out simply because markets take a nosedive. It is when prices are low that the high-octane power of DCA truly kicks in. You might find it useful to reread this column straightaway and take down notes on how you might choose to use DCA for yourself. In next week's Money Thoughts column, I will explain the mechanics and specifics of an automated emotionless system to help you implement your personal DCA programme. I suggest, though, that you harness this proven strategy cautiously. By that I mean IF you've never embarked upon such a disciplined approach of investing, first reach out to a trusted remisier, unit trust consultant, banker or licensed financial planner to discuss your needs, wants, dreams, goals and plans. Then, with those in mind, start your personal (and personalised) DCA investment strategy, and stay the course — through good times and, more importantly, bad ones. Here's wishing you enormous financial success in the decades ahead. © 2025 Rajen Devadason