In the past I wrote two posts sharing about a friend who starts dollar cost averaging 2 months before the great financial crisis.
You can read about them here:
- Oh Shit! I started DCA investing at the top of the bear market
- Dollar Cost Average into STI ETF right before GFC revisited
As a primer, the STI ETF is like a listed unit trust that mimics what stocks are held in the Straits Times Index, an index of Singapore Blue Chips, or largest companies in Singapore. If the index go up 1%, the fund must go up 1% and vice versa. You are entitled to received dividends, as the underlying blue chip business distributes dividends so the STI ETF, at the discretion of the manager, distributes an average dividend. You pay a brokerage commission to buy it and annually there is a 0.3 to 0.4% expense for the internal cost of managing it.
The two articles studies the effects of disciplined dollar cost averaging way to build wealth with a single country based index (Singapore). The second article provides an encouraging result in that the IRR turns out to be 5%.
However, one thing that bugs me is how that original investment 2 months before the GFC would have turned out if its not a dollar cost average, but a lump sum investment.
That first purchase was carried out at $33.61 or some where when the STI index is at 3300. If you study the STI Index you will realize that the price of the index is barely above 3300 for the past 7.5 years. The highest point reached was 3500 and momentary at 3800.
7.5 years and we are still below it.
The DCA results show that if you put in your hard earned wealth fund in the STI ETF, you would end up positive. In the case of a lump sum, you would have lost money. However the dividends distribute over the past 7.5 years makes up for the disappointment.
The IRR up to now is 2.82%. That’s somewhat like an insurance savings endowment’s rate of return. There are folks that tell me this is too low of a return, to justify the kind of stomach wrenching volatility they need to go though. That is fair enough. To invest with this approach you have to understand the philosophy of what is necessary, and a large part of it includes how ETF investing works, what you need to do and behavioural finance (or how your brain will make you do stupid things).
We won’t know what the future would bring, and I find there is too much things sold based on USA based indexing that preaches you will make 7% returns per annum. This is as if all country will mirror the returns of USA.
When it comes to single country index investing, things might not be so simple after all.
Still this studies does show the ability of dividends as a form of market return that should be counted as part of your return, and an important part at that.
The story is not completed yet, there are still many years to go.