Investing using dollar cost averaging at the market top may not be that bad if you invest in the right investment and are discipline enough throughout.
In the past week, we written about the advantages of investing in low cost index funds or exchange traded funds (ETF) for people who do not want to take such a hands on approach with investing but want to make the virtues of early life compounding work for you.
In the Singapore context, many have highlighted Street Tracks STI ETF as the ETF that they use when they want to practice low cost index investing. STI ETF since 2002 inception have generated an annualized return of 9% with 38% of the returns originating from dividends. (Read report here)
Meeting up with an old friend
I managed to meet up with a friend of mine that I haven’t seen for some time. I best remember him for being a person unaffected in the most difficult times we faced.
We used to share some conservations on investing and the experience I remember best was his investment in Macdonald’s Corporation (MCD). MCD is the best dividend growth stock perhaps in the past 10 years. Great business model and it starts at a 3% yield but the crazy thing is that its dividend growth for 5 years have been 20%! That 3% basically doubled in 3.6 years.
My friend probably bought MCD at $70 (which at that time I thought it was expensive. ha! anchoring at work!) yielding 3%. The price now is $94.
Buying STI ETF near the all time high
So he lamented that he started investing in the STI ETF. To him it’s a no brainer way of making your money grow with the progress of Singapore.
The problem is that he invest in May 2007. Now when you hear that, your heart may jump out since that is at the very top of the Great Financial Crisis (GFC) that took nearly 60% off the STI index.
Dollar Cost Averaging the STI ETF using Lim and Tan Unit Share Market
Now I found out further that he didn’t just invest at the top of the market.
What he does is
- Set aside a sum of money per month
- Every month since May 2007 he put $1000 into buying odd lot shares of STI ETF
- Doesn’t like to wait for three months then invests
Now he uses Lim and Tan which gives him access to the unit share market. For the readers asking me how to dollar cost average with a smaller sum this may be the way.
My take is that Lim and Tan charges you the same commissions like you trade the full lot, compare to Philip Securities which charges $10.
Price Chart for STI ETF
(Click to see larger graph)
The price where he started investing was absolutely brutal. If I am correct that is the worst market plunge since 1997 Asian Financial Crisis.
Since then, the market didn’t return to the top of 3800.
The price summary shows where he got invested in. The common guess is that my friend suffered large losses even till this date. Even 2011’s high took it back only to 3300.
Total Returns of his Dollar Cost Averaging plan till date
I talked in the past of another friend who stopped his Dollar Cost Averaging plan when he anticipated the bear market. (See report here)
Good choice? That friend still believes in his astute market timing capabilities.
Lets look at this friend’s returns.
(Click to see larger image)
By adding $1000 every month, he put it a total of $50,000 to date. His return for 5 years is 9.24% with 85% of returns made up by dividends. Annualized the return is 1.7%.
His average cost have gone down to $2.80, which was much lower than the $3.10 he estimated.
Disciplined Approach to Investing
What impresses me about how my friend conducted this was that he is not DCA automatically, but every month he has to initiate that himself!
My friend did not let the early losses get into his head to stop him from abandoning his DCA plan.
And because of that it really saved his portfolio because he added a lot of units at $1.60-$1.80 prices which balance things up.
The majority of the returns had been from dividends, and without the dividends the returns would have been even more pathetic.
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If you have been investing for some time but have not kept up to date with keeping track of your returns do contact Drizzt at [email protected] if you would like me to profile a stock or a portfolio this way.