Dollar cost averaging is a well known method of investing. I won't go into it, as you can already find good explanations on it easily, like this Investopedia article. Targeted Averaging In uses the same principals, but with an improved aspect that almost guarantees that you will overshoot your investment targets. Ill try to explain this with an example.

Say Gareth has just started working and he commits to saving $10,000 a year.

Instead of saving $10,000 in the bank, he does 2 things differently.

Say in year 1, the index price is $900 per unit, so he buys 11 units @ $9,900 and puts the remaining $100 in his bank account.

In year 2, the index price increases to $1000 per unit, so his initial investment is currently worth $11,000. To get to his target of $20,000 this year, he invests $9000, buying 9 units.

In year 3, the market crashes, the index falls to $800 per unit. His initial investment is now worth only $16,000. His target for this year was $30,000, so to make up the difference, he needs $14,000, but he only committed to invest $10,000 a year. He has $1,100 balance from the previous year, so he buys another 13 units @ $10,400 and leaves the remaining $700 in his bank account.

Reading it like this, it doesn't sound like this investment works right? Well, lets have a look at historically how this strategy performed.

Say Gareth has just started working and he commits to saving $10,000 a year.

Instead of saving $10,000 in the bank, he does 2 things differently.

- He invests the $10,000 in the S&P 500 index in the US stock market.
- Every year, if the total value of his investment doesn't reach his target of $10,000 a year, he will make up the difference, but only up to a total of $10,000 a year.

Say in year 1, the index price is $900 per unit, so he buys 11 units @ $9,900 and puts the remaining $100 in his bank account.

In year 2, the index price increases to $1000 per unit, so his initial investment is currently worth $11,000. To get to his target of $20,000 this year, he invests $9000, buying 9 units.

In year 3, the market crashes, the index falls to $800 per unit. His initial investment is now worth only $16,000. His target for this year was $30,000, so to make up the difference, he needs $14,000, but he only committed to invest $10,000 a year. He has $1,100 balance from the previous year, so he buys another 13 units @ $10,400 and leaves the remaining $700 in his bank account.

Reading it like this, it doesn't sound like this investment works right? Well, lets have a look at historically how this strategy performed.

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**Index values are from 1st Oct of each year, as it is currently Oct 2018. The analysis results are similar regardless of which date of the year you decide to use.*

Assuming he starts in 1970, today his total investment would be worth $2.72 million, while only having put $89K in total over 48 years.

You can adjust the years above to see how this investment has performed, depending on the start date. You will notice that, even if you started investing during the height of a crash, your total investment value today would inevitably be worth much more than what you put in over the years.

Started in year 2000, total invested = $99K, value now = $262K.

Started in year 2007, total invested = $59K, value now = $130K.

What's more, his total amount invested never goes above his initial commitment of saving $10,000 a year. Using the 1970 example, he still has $400,000 balance of savings in his bank account, which he never put into this investment. So in fact he has a total of $3.12 million in 2018.

## A complication (for Singaporeans...)

The above sounds great doesn't it? But for the Singaporeans out there, there is a complication. Our currency has been getting stronger and stronger every year and the USD has lost about half it's value against the SGD since 1970. So an investment in USD is going to result in less juicy returns once you convert it back to SGD, but how much less?

The following table calculates the returns assuming you embark on this investment using SGD targets, but converting them into USD to buy the index. It's a lot more complicated than the table above, as it is dealing with 2 currencies now, but the gist is the same.

The following table calculates the returns assuming you embark on this investment using SGD targets, but converting them into USD to buy the index. It's a lot more complicated than the table above, as it is dealing with 2 currencies now, but the gist is the same.

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Using the same examples as above,

Started in year 1970, total invested = $110K, value now = $1.76 million.

Started in year 2000, total invested = $126K, value now = $280K.

Started in year 2007, total invested = $55K, value now = $129K.

Since the 1990s, the exchange rate has somewhat stabilized, so the results are not that much different. The 2007 case seems to have performed even better than without the exchange rate impact.

Either way, still looks like a smart alternative to saving your money in a bank.

Started in year 1970, total invested = $110K, value now = $1.76 million.

Started in year 2000, total invested = $126K, value now = $280K.

Started in year 2007, total invested = $55K, value now = $129K.

Since the 1990s, the exchange rate has somewhat stabilized, so the results are not that much different. The 2007 case seems to have performed even better than without the exchange rate impact.

Either way, still looks like a smart alternative to saving your money in a bank.

## Why this works

## Psychology

Humans are horrible at timing the market. When we think the market is crashing, we usually reel in pain and withdraw our investments. When the market is in a bull run, we invest more and more. This behavior inevitably leads to poor investment results.

This method forces you to invest more during a downturn and invest less during an upturn. In other words, you are buying the bottoms without you even realizing it. You will be doing a much better job of timing the market than most investment managers out there.

This method forces you to invest more during a downturn and invest less during an upturn. In other words, you are buying the bottoms without you even realizing it. You will be doing a much better job of timing the market than most investment managers out there.

## Market

The chosen investment vehicle is the S&P 500. This is a historical chart of S&P. Given enough time, it heads only in one direction - up. I will discuss why this is so in detail in a future article.

Do note, in the short run, the market can perform a correction. Just look at year 2000 - 2008. Hence to guarantee this works, you need to commit to it in the long run.

## How-to guide

- Setup a brokerage account that lets you buy exchange traded funds (ETFs) in the US market. If you have one at the moment, great. If you don't, check out this article on what you need to look out for when selecting a broker and my own broker setup for your reference.
- Type into Google "SPY ETF price". The first result should show you the current price of the index.
- SPY is the exchange traded fund that tracks the S&P 500 index. You are buying this ETF as you cannot buy the index directly.

- Set an annual savings target that is manageable for you at your current salary. If this works out to be less than 1 unit of the SPY ETF index, do not worry, put your money into a bank account and starting buying 1 unit once you have saved enough.
- Convert your annual savings target into USD and divide this by the current price of the SPY ETF. Round down so you don't exceed your planned investment. Whatever balance is left, leave it in your bank account.
- Log into your brokerage account and buy the number of units of the ticker SPY that you calculated above. Each broker will have a different interface, but the steps are the same.
- Go to the trading view.
- Select the ticker symbol SPY.
- Select "Buy".
- Select the quantity you want to buy.
- For order type, select "Market" (for the cringing seasoned investors out there, don't worry, the spread is minimal due to the high liquidity) - if you don't understand what's in the brackets, ignore it :)
- Hit Submit.

- Go to the trading view.

- Shut down your brokerage trading platform and don't look at it.
- Setup a bank account and deposit the balance of the savings target you did not use to buy the SPY ETF.
- Exactly one year later, come back and have a look at what is the value of your initial investment.
- If the value has gone down. Repeat exactly what you did in the first year. Include the balance in the bank account in your calculation for number of units to buy.
- If the value has gone up, take your savings target and minus away the profit gained. This is your new investment amount. Repeat the purchasing of more units with this reduced amount. Deposit the balance you did not invest into the bank account.
- If the value has gone up so much it has gone past your total current savings target, take your full savings target for this year and deposit it into the bank account.

- Repeat forever, or until you stop working.
- If you need the cash, sell the units and enjoy spending :)