Power of Zero Cost Averaging

Hi Readers,

It was a slow month for us due to school holiday, Raya festive seasons and weak market breadth despite uptick in KLCI index. The last few weeks market movement was mainly driven by local institution such as EPF and KWAP swooping in on selective blue chips and selling positions at the same time. Foreign fund continued to shy away from Malaysia as can be seen below extracted from MIDF Research Report.

Image 2: Net Flow of Foreign Fund into SEA Emerging Markets

Image 1: YTD Performance of Major Market

As usual, there is always much abuzz whenever big institutions like EPF and KWAP buying or selling. Buying is always seen as good thing and possible good news coming while selling is always seen as bad thing. However, if we really look at it closely, what EPF and KWAP did is a mere zero cost averaging or risk management or generating cash flow. How can we adopt the approach and does it really beneficial for us as retail investor? Have you been using the zero cost averaging method to manage your positions?

By definition, the idea behind zero cost averaging is to sell enough shares for a profit to equal the cost of those shares without selling them all. As retail investor, the bottom line for us is profitable positions and generating extra cash - cash flow. Our wish is always to ride the trend to the maximum and staying as long as possible with minimum emotional decisions - buy and sell. Hence, zero cost averaging is a powerful method that should be adopted by retail investors as well. In general, there should be sufficient diversification in our portfolios to minimize risk. There are 3 types of portfolios that we should all have in the long run:

1. Growth Stocks:
• Riding the growth of the company; sales growth outpaced profit growth; sustainable growth
• Accumulating over a period of time, accumulate during weakness
• Typically positions held is more than 3 years
2. Dividend Stocks:
• Company that distributed consistent dividend payout yielding more than conventional fixed deposits. Capital appreciation from the stock price is a bonus.
• Accumulate during weakness when it is selling below its intrinsic value
• Positions held as long as there is continuous dividend payout
• This portfolio tends to perform well during period of uncertainties 
3. Trading Stocks
• Short term holdings riding the bullish sentiments with the main purpose of generating cash flow
• Positions held can be minimum of 3 weeks to 6 months

For all the readers that have been following us, you will noticed that we have been sharing stocks that falls into the 3 categories above. You can use the zero cost averaging method to manage all your positions in your portfolios and growing it over TIME. So, what it takes to do so:

1. Create a portfolio tracker
2. The information below should be in your tracker
• Initial cash allocated per stock
• Last price
• Cash balance
• Shares value
• Unrealized profit/loss
• Buy and Sell Transactions (price and quantity)
• Dividend received
• Profit/Loss
• Balance of Investment (quantity and value)
• Average holding cost (Balance of investment value - Dividend Received)/Bal. quantity
3. The tracker can be used to manage the situations below:
• Record down dividends received - bring down average holding cost
• Locking in profits to generate cash flow - bring down average holding cost
• Reducing positions for losing positions to minimize risk - increase average holding cost temporarily, reduced quantity and reduced further losses, lower the average holding cost in future when opportunity arises
• Regardless whether its a winning or losing positions, you will have full visibility on the current status and understood what it takes moving forward
• Staying in a position as long as it takes while bring down the average holding cost, to the extend of zero cost / free shares

Therefore, big institutions like EPF and KWAP buying or selling is not as scary as we thought. The reason behind is that their fund managers are managing the positions that they are holding. Many of retail investors failed to understand the power of zero cost averaging. When we exit a profitable positions, we will never be able to buy back at such lower price again. 

I hope this article will give you a guide on how to create a simple portfolio tracker and apply zero cost averaging method to manage your positions.

Good luck and all the best!!!

p/s: We will be sending a sample tracker that we have created to assist you in creating the tracker that suits your own needs. We will send it to the email that was deposited via our blog (on the right side of the blog page). Please be on the lookout for our email that contains the sample tracker. Have fun in learning the method of zero cost averaging. 

Disclosure: The information above is for sharing purposes without any understanding of investment targets and needs of readers. References to the price movements is informational based on my analysis and data obtained from sources believed to be reliable at the point of writing. Please do your own due diligence as this article is not a recommendation to buy/sell.