Question

1) By making reference to literature and quoting individuals withing the financial sector, explain in detail the dollar-cost averaging strategy for passive investing. (300 words)

2) By making reference to literature and quoting individuals withing the financial sector, explain in detail the unpopular companies and bargain issues, special situations, foreign element and margin of safety strategies for active investing. (700 words)

The strategies mentioned above can be found in the book The Intelligent Investor by Benjamin Graham

Answer 1

Answer(1):

Passive investment strategy- It refers to buy and hold the shares or other financial products for long term horizon, these investors have long term goals so invest for long term and have patience.

Dollar-cost averaging strategy- It is a simple investment strategy that reduces overall risk and maximizes return. In this method, investor does not invest full amount at a single time rather he invests some amount on the regular intervals for averaging the cost of investment. Some investors are passive investors who invest a fixed or little amount regularly for long term, in this way, their risk is minimized and return is maximized. Investors want to reduce the impact of volatility in the market so they invest periodically. Dollar cost averaging protects passive investors from market fluctuations because it works best in the long run. This strategy can be done automatically, you have to give standing instructions.

Example: Systematic investment plan (SIP)- In mutual fund, many funds provide SIPs, in which you need not to invest lump sum amount at a time, you have option of investing minimum amount with regular intervals like forthnightly, monthly, quarterly etc. SIPs balance your portfolio wheen there is downturn in the market, when Net present value is down, they average the value of your fund and your portfolio value does not come more down.

401 (k) plan- If you contribute regularly and invest an amount regularly or periodically then you are already doing dollar cost averaging.