Home' Trinidad and Tobago Guardian : January 18th 2015 Contents JANUARY 18 • 2015 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCIAL ROAD MAP | SBG7
Cynthia, 27, works as a radi-
ographer at a medical insti-
tution in San Fernando. She
currently earns $15,000 per
month. Cynthia is an avid
saver and every year for the
past five years on her birth-
day, she has been investing $10,000 in a stock-
based mutual fund. Every year, just before she
invests, the fund manager would pay out a
distribution of approximately 3.0 per cent on
Unit prices have been changing constantly
and she has bought into the fund at the fol-
lowing prices: $13, $11, $15, $19 and $17, respec-
tively. She noticed the price she pays for a unit
is predictably 5.0 per cent higher than the price
she can immediately redeem it for. Cynthia is
finding it difficult to evaluate if this investment
is working for her and wants to make a decision
if she should stop, continue investing or cut
her losses and try something more stable.
This is a very common dilemma that many
investors face especially with instruments that
have all of these variables to consider. It s
almost as though Cynthia is trying to pin down
a moving target. In fact, this variability in the
unit prices presents a unique opportunity for
Many investors experience a roller coaster
emotional response to the ups and downs of
such investments and buy when they think
the upward trajectory will continue and sell
when the trend is on a decline.
One good thing about Cynthia s investment
is that she is not putting money into any single
stock. She is actually pooling money with hun-
dreds of other investors and the fund manager
then takes this and directly invests it in several
So, in terms of risk, she is actually not taking
the full brunt of any "on paper" losses on the
stock market. Conversely, she is also not getting
the full benefit of direct investing either. If
Cynthia were to do so, she may need to do
more hands on management. This management
is what is being paid for when she takes the
5.0 per cent hit in the difference between her
purchase (offer) price and selling (bid). price.
The challenge with this initial charge is that
Cynthia s investment needs to recover from
this cost then start making money.
To make money with such investments her
strategy is what matters most: a steady, sys-
tematic approach is the key, coupled with a
degree of emotional detachment. If the periodic
declines are keeping her up at night then this
investment is not for her. So for all intents and
purposes, Cynthia is indeed employing the
recommended strategy for this instrument.
The big question: is Cynthia making money
and should she hold, sell or continue?
Nick's analysis and advice
First off, by investing a fixed amount of
money at regular intervals at different prices
means that when prices decline, she is pur-
chasing more units than when the prices
increase. When prices increase, Cynthia is
making money on the "cheaper" units pur-
chased in a previous cycle.
Of course, the higher priced units incur a
loss when the unit price falls but when the
decline meet the increase, there is a cancelling
out. The approach is called the "dollar cost
Table 1 below and graph above titled, Analysis
of Changes in Unit Prices, illustrate this effect.
When we total up each year s purchase (offer)
price and then divide it by the number of years
($75/5years) we get an average price of $15.
This is the benchmark or hurdle price above
which if she sells off everything---will realise
a profit---Cynthia will be "in the money". Now
even though the average offer price is $15 she
can really only realise a gain if the bid price
(now $16) is above it, as this is the price at
which she redeems her units. So from a price
standpoint, Cynthia is in a safe place, however,
as prices continue to change, the average will
go up or down.
Number of units
The strength of this investment is in the
number of units she purchases. The more units
Cynthia owns, the broader the base of her
investment to profit from increases in prices.
Cynthia acquires units from direct purchase
with her annual investment and from distri-
butions paid by the fund manager; the latter
includes the dividends earned on the underlying
In year two, when prices were at the lowest
($11) she bought the greatest number of units
(909 units). In year four, when the price was
at an all-time high ($19), she purchased the
least number of units (526 units).
At the end of the five-year period, Cynthia
has amassed a total of 3,670 units in this fund;
3,460 which she purchased on her own and
211 which she earned from distributions.
Value of units
At the end of the day, what each investor
wants to know is: did I get richer or did I get
poorer and what was my return on investment
over the period?
The first question is very important because
nobody wants to put in money and have less
when they are done.
Even though the contributions increase
steadily, the same cannot be said about its
In fact, in year one and year two she actually
had less money than what she invested. This
was attributable to the "bid/offer spread" and
the fall in price.
From the third year onwards, she saw a
reversal in her financial position as prices
climbed. Even when prices fell off from year
four to year five, she was still in the money.
She did, however, make a greater "on paper"
(unrealised) gain in year four than year five.
At any point in time Cynthia can cash in on
her gains but, as long as she stays invested,
both gains and losses have not taken effect.
Return on investment
At year five s bid prices Cynthia s portfolio
was valued at $59,276 which is $9,276 more
than what she invested. On the surface it
appears as though she achieved a total period
return of 18.55 per cent ($9,276 / $50,000) or
3.71 per cent per year (18.55% / 5 years). How-
ever, when we bring the impact of time into
the picture and the fact that the $50,000 was
not invested all at once (using a special time
value of money calculation) we would see that
her effective or internal rate of return on this
investment was actually 8.52 per cent per year---
not bad at all!
Cynthia is only 27. She has a lot of time
ahead of her to recover from any losses in value
or, conversely, benefit from her fund s per-
She can also---as some investors do---sell off
part of her portfolio and place the funds in a
less volatile instrument such as a money market
fund; limiting her exposure to unforeseen risk.
So unless Cynthia is up at night worrying
about her investment or needs this money
right away, she could stay the course and con-
tinue to invest as she has done for the past
five years and see what the market has to offer.
Nicholas Dean (Cer-Fa) is a financial coach
and mentor who is the managing director
of the Financial Coaching Centre. He can be
Steady, systematic---the key
Cynthia can also---as some
investors do---sell off part of
her portfolio and place the
funds in a less volatile
instrument such as a money
market fund; limiting her
exposure to unforeseen risk.
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