 Personal finance practice problem using OneNote. Mutual fund periodic investment average cost calculation. Prepare to get financially fit by practicing personal finance. You're not required to, but if you have access to OneNote, would like to follow along. We're in the icon left-hand side practice problem tab in the 13111 mutual fund periodic investment average cost calculation tab. Also, take a look at the immersive reader tool of the practice problems typically in the text area too with the same name, same number, but with transcripts, transcripts that can be translated into multiple languages either listened to or read in them. We're imagining investment in a mutual fund. Remembering that as individual investors, we could invest in individual stocks and bonds, but typically we utilize the tools such as mutual funds and ETFs pooling our money together with other investors. The fund then investing in a broad array of securities in accordance with the structure, the terms of the fund like stocks and bonds is generally allowing us more diversification. Also remember that if you're investing in a retirement type of account 401K plan or an IRA or something like that, you can usually think of that as basically a mutual fund under the umbrella of a 401K plan or an IRA which has tax implications and has implications in terms of restrictions on when you can pull the money out, but they're not completely like separate in your mind oftentimes because usually you're using the tool of say some kind of mutual fund under the umbrella of some kind of tax shelter, some kind of retirement type of account. Now, keeping that in mind, the question then comes up. If I'm going to make investments periodically possibly saving for something like retirement, how am I going to be making those investments? When's the best time to be putting my money into the investment? Now, when we think about this concept, we can think about it in a similar way as we were investing in an individual stock or if we're investing in a mutual fund for most investors, individual investors, we're probably putting our money periodically into something like a mutual fund like a retirement account like an IRA or a 401K or something like that. Now, the idea, the general idea would be that if you're looking at the short term and you're investing in something that's going to be invested in stocks, then there's going to be a lot of volatility in the short term oftentimes. And obviously we would like to be then investing at basically the bottom point. That's when we would like to buy when we're putting money in and we might be putting money in basically on the long term, but we don't really know when the bottom is on these short term ups and downs and we're hoping on the long term if we're investing over like 30 years or something like that, then we have a pretty good upward trend over that long term time frame even though when we zoom in, there's more dips and valleys on the short term. So one way the easiest way to kind of make our investments would be I'm just going to be putting money in periodically whatever that periodic interval will be for most people that would be with their pay. So meaning every time they get a paycheck, you automatically be putting money into some kind of retirement plan which is basically like a mutual fund oftentimes although under the umbrella of a retirement plan which could have tax benefits and some restrictions related to the money. So if that's the case, then you're going to be putting money in whenever you get paid weekly, bi-weekly, semi-monthly or monthly. And sometimes you'll be putting money in at the best point when the price is lower on the short term intervals sometimes in the middle, sometimes at the peak. But hopefully you're just basically going to average out over time and since you're a long-term investor, the idea is that you should be good on the long term. That's kind of the easiest thing to do. That's the most hands-off kind of thing to do. The least stress kind of thing to do. Now there are some more complex methods that you could get into and try to say, okay, is there a way that I can try to start investing more when I could see a dip in the market so when it's going down, I'm going to be investing into the basically the dip so that I buy more at the lows on the short term speaks peaks and valleys. You can try something like that, but it gets a little bit more confusing when doing that because then oftentimes you're going to be basically kind of holding onto your money when you're at the peaks and you're going to be waiting for when to be putting money in at the truss, for example. And it's going to be very difficult. You can't really time exactly when the bottom is and when the top is. And oftentimes it leads us to do more speculation when we try to invest in that way as well. And if we invest based on our fear, then what will happen is we're going to invest at exactly the wrong time oftentimes, right? Because when the stock market is doing quite well, its sentiments are high. So we actually tend to want to be putting more in because we think it's just going to keep going up forever. Everybody thinks that. That's why it keeps going up at that point in time. And when it goes down, we got the idea that it's going to go down forever. And so we might incentivize to not only not put money in, but even try to take money out, which is oftentimes you can get on the wrong side of the cycle. So as individual investors, oftentimes we just invest like periodically is a good long-term strategy. Okay, so keep in that in mind. We're going to have our periods of X1, X2, X3, X4. We're going to say these are years. But remember that you could think about this in terms of every paycheck, every two weeks, every week, same kind of concept. Now, as you're doing your investments, it could be nice to just have a little table down here with your investments. We're going to have the year, the investment, the price, the number of shares. And this is what we want to consider. How many shares we're basically purchasing as we put in a fixed amount of investment in each paycheck, for example, or each period. Total shares, total value, the change, the total investment and the gain or loss. And we can actually plot this down here, which we do in Excel. So this is a nice little table you could put together and follow your investments and basically track it in Excel if you so choose. So you can go to our practice problem in Excel if you want to do that. So we've got a standard amount that we're going to be putting in each pay period. Although we're putting in a standard amount, we know that the price per shares of the mutual fund, not an individual stock, the mutual fund is what we're buying. The price of the mutual fund will change over time. So we're going to be buying different numbers of share even though we're putting the same dollar amount of investment in. So for example, in X1, we're going to say that we're going to put in 1,300 because that's just what we've decided to put in. The price is $50 at that point in time. So if I take the 1,300 divided by $50 per share, we bought 26 shares of the mutual fund. So then if we say in year two, or this could be pay period two, the next two weeks to next week, whenever your pay period is whatever and the next standard interval, we're going to pay another 1,300. But now the price has gone down, which notice that's not good for our original event investment because we bought them at $50 and now those 26 shares we had before actually went down in value. So that's not good. We lost money, but from a purchasing standpoint, notice if we were trying to analyze should we be purchasing in the short term we're going down into this trough. So now you're thinking, I don't know when the bottom is, but if you were trying to guess, you might be saying, well, I'm going to buy into the trough, right? Because I'm going to buy as the things are dipping. I'm going to buy in the downturns possibly. So but we're just we're just putting money in each time. But if you were trying to figure out in more detail, trying to try to guess where the bottom is, you might be investing, trying to invest more when the money's when the curve is going down. But in any case, we're going to say we got the 130 divided by the 31. So we bought, we put in the same amount of money, but now we got way more shares because the share price is of course lower. So the total shares we have now before we of course had 26 shares and now we bought another 41.94. We've got 26 plus the 41.94 is going to give us that 67.94 shares. The value at this point in time was it was before we had 26 shares and they were valued at $50. That's where we get the 1,300. But now those shares went down. Even those shares, those 26 shares are now only worth $31 because they went down, but we bought the more shares as well. So at this point in time, we've now got all shares are now 67.94, which are now valued because it's the same mutual fund, which is diversified portfolio within the mutual fund times 31. We hope it's diversified enough. So that's going to be the 2,106 is the total value. The change then the difference between the two is the 2106 minus the 1,300. We've got the 806. The investment before was 1,300. We of course now put 1,302 times 1,300 plus 1,300. Total investment is now at the 2,6. And we've got the gain or loss at this point. We've got a loss of the 494. And that's going to be our total investment because we put in 2,600 and the value at this point in time is 2,100. So minus 2106, that's the 494. Okay, so then in year three, we're going to put in the same dollar amount. Year three, you could think of similar process with a period three, second week three, every two week period. Now the price is 44. So it's still lower than the original price, but it went up from 31. So now you can imagine like if I'm on the short term, we'd be here, we'd be going up again on the upside of the trough. Now, if you were trying to figure out what's the best time to be putting money in when you're on the upside of things, you might be saying, well, I'm not going to be putting money in as we're going up, right? Or I'm going to try to put less in maybe as we go up. If I was trying to guess what's going on with the market because I want to be buying into the downturns, into the dips, for example. So you could try to come up with methods so that you're trying to buy into the dips. But again, that could be difficult because you end up with these long time periods possibly where you're holding on to money when the market is going up for long periods of time and so on. So we're just investing every period, right? Every whatever, two weeks, one week, in this case, year. So now we're going to say we put in the same 1,300 divided by the $44. That's going to be 29.55 shares. How many shares do we have now? Well, before we had 67.94, we bought another 29.55. We're now at the 97.48. The total value then, those 97 shares, 97.48 are all valued because they're all in the same mutual fund at the current price of 44. That's the market price. So that's going to be the 4289. The change, the difference then is going to be 4289 minus the 2106. So there's a difference of the 2183. The total investment then is now 1,300 plus 1,300 plus 1,300 or 1,300 times 3. And then we've got the total investment at the 3,9. The total investment, hold on a second. I typed in 3,900 minus the value, which is 4289. So now we at least have a gain of the 389. Then in year four or period four, week four, two week period four, whatever another 1,300. Now it went up to 52. So now we've cleared what the original price is. Again, if you were trying to figure out, should I be investing, you might be saying, well, now it looks like I'm closer to one of these peaks in the short term. So maybe you would say, I'm not going to invest. But again, you could end up in a situation where it just keeps going up and you end up holding on to money and so on and so forth and driving yourself crazy. So instead, we're going to be using the strategy that we're just investing every period, every two weeks, every week as we said or so on, even though it looks high at this point, we're not sure it's the peak because it could keep going up at that point. We wouldn't know in real time whether it's going to go up or down. So then we're going to say, OK, so now we got 1,300. But now it costs $52. So we only get 25 new shares from that. We had before 97.48 plus 25. That gives us to the 1,2248. Now, although we only got 25 new shares, the fact that it went up to $52 is good because that means all the other shares that we had also went up to the $52, right? So it's not a good buying time, but we like the market going up because that's good for what we're holding on to clearly. So we're going to, I mean, if we knew exactly where the dips were, we would be buying the dips but celebrating the rises, right? OK, so here we go. We're going to take that and multiply that times the price of $52 because all our shares are worth $52 to get the total value of the 6369 about. The change is the 6369 minus the 4289. So we got the 2080. The total investment is now we have invested 1,300 times 4,5200 and then the gain or the loss at this point is going to be then we've got the 5200 investment and the value at this point in time is 6369 and that gives us our gain of 1169. So you can imagine if you build this table in Excel, we'll put the totals down here, but you might not have the totals and you just keep on running this down each week as you put more money into the investment or periodically and you can actually then have a nice table of what's going on. You can have a nice table showing what's happening with the price as you go, a nice table showing the number of shares and the total shares going up and you could plot those and the total value. This is probably the thing that you're going to be most likely plotting, right? You got the total value and then you got the change. You've got the total investment which you can add up and you've got the gains and losses. So then the average cost then is going to be the 42. The average cost meaning we then had the investment of 5200 and we ended up with 122.48 shares, right? Divided by 122.48. So average cost around $42. Notice that it started off costing 50, then it went down to 31, then up to 44 and the 52 average 42, 46 over that time frame. Now then again, you could plot this out which could be a nice, really nice tool in Excel to give you a nice quick kind of a graphic and again, you can add to your table periodically as you go and then you can come down here and say, okay, what's been going on lately? This one we plotted out the total value. So the total value and the total investment. We've got the periods down here, period one, two, three, four and five and then of course the total investment went up static because it's a straight line because we're investing just the 1,300 per period and then we can see that we had this dip from the total value went under because it actually went down here. So we could see that here it went from the 1,300 even though we put 1,300 and again it went down to 2,106 because we had that loss on the second one right there and then you could see it kind of broke even at this point here between period two and period three and then of course now we've got the total value outpacing the investments which is what we want to see. So the total value at the four, two, eight, nine. So right there and then it goes up to 6369 which is right there outpacing the investment which ended off at the 5,200 which is nice. So again, this table you can plot your own kind of table and Excel and just keep on having your running balances go down here and have a pretty easy like quick visual that keeps you more actively involved than possibly just passively looking at a graph on some other chart for the investment as a total as a whole. And that can hopefully that gives a lot of people more feeling of activity in the investment although it can also lead to anxiety when you see something like this happening down here when the market goes down and it's hard to remember that we are long-term investors usually if you're investing long-term for retirement and so usually if you keep a strategy like this you're better off than at least acting in terms of fear, right? You're better off than saying I'm going to act when I'm uncomfortable, right? Because that's what drives the market to have the peaks and troughs. You're going to end up if you act out of fear when things are going up you're going to be buying up the peaks because that's what the animal instincts or what do they call it? Well, are at right there and you're going to be following the crowd and then when it gets to the trough we're going to be scared and saying we're going into its recession times are never going to be good again and you'll end up selling everything at that point in time. So to avoid that, that's one reason you kind of do a periodic investment kind of strategy although again you could try to do some more strategies where in the short term you try to buy into the dips when possible a little bit more but you never know when the bottom is so that's difficult and that also leads to more kind of stress if you're not more engaged in your investments if you're more of a passive investor then you might just invest periodically plot your graph out so you feel actively involved in it and remember you're looking at the long term time horizon if you're investing for retirement or it's like 20 years out or something like that so the short term peaks and troughs you've got to take a step back and visualize that how's that going to work out and the long run hopefully you'll be okay is the general theory