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Should you stop dollar cost averaging stocks in this correction / bear market?

So we know that you have a Philips Share Builder plan from Philips Securities, which essentially lets investors dollar cost average into certain Singapore blue chip stocks.

Now this plan is good in that

  1. It acts somewhat like a force saving making you put aside the money
  2. It ends up as odd lots (since each time you buy so little shares) making it difficult for you to sell it off
  3. Takes the market timing out of the equation

Now note you can stop your DCA anytime. Which bring us to this article.

I have a relative who likes this form of structured investing or investing based on a portfolio manner. The worst thing I did was to seduce him into the benefits in investing in telcos such as Starhub and Singtel.

So we know the market hasn’t done very well recently and my relative, being a student of economics sees that there are just too much troubles out there.

The best time to invest is when the trouble clears.

So he was DCA into Singtel all this while after my persistent advocation but recently I understand he have stop DCA. The reason?

It is stupid to DCA when the trend is going down

Now this is interesting for me because there is no correct or wrong answer here.

Recession Sturdy Business Model

We have a DCA candidate here that have a strong utility like business model. It is unlikely to falter as in a recession, your handphone is your business and communication asset. You will still need this service.

Though profits may be affected, they are unlikely to go bust anytime soon. Lack of business will actually bring down capital expenditure.

Consistent trading price range

Since July 2009, it has been in a consistent trading range, the lowest $2.66 the highest $3.20. A channel of 16% drawdown maximum.

Price is not far off from bottom

The lowest price reached, discounting the spike at the end of 2009 recession was $2.30. That is a maximum of 25% drawdown

What are the likely scenarios

Now here are 4 scenarios that I can see drawn out and how DCA will be affected

  1. In the green arrow, the price will trend upwards. Rather unlikely, as there are not much near term catalyst. In this case stopping your DCA will make you missed out on most gains. Yes, you can always restart it, but we will come to this later. You have to be nimble though.
  2. On the opposite end you have the red arrow. This will be like the 2009 drop, where even all the good stocks drop in a matter of 2 months. If you stop DCA, you are likely to missed out on such a drop. You are likely to suffer from either paralysis (because you think it is likely to continue to go lower) or you will see this as an opportunity to kick start your DCA again.
  3. The third scenario is the one my relative things, which is the orange arrow. It is a long drawn draw down. And stopping DCA means you do not suffer much capital loss. However, it is likely that in such a scenario, you get a lot of false hopes when you can kick start your DCA again.
  4. The last scenario is in the blue arrow. This is when the bear market comes and goes, and Singtel still ends up in the same range! If you look at the market it is in a 13-15% correction, many stocks have fallen, yet Singtel is still at the same place. Stopping DCA will mean waiting and waiting and waiting.

What is my take on this

Essentially,

  1. I think my relative is market timing. Like me he thinks he can outsmart the market. He will have to get his DCA right.
  2. He is stopping his force savings plan. Is that desirable?
  3. He is doing excessive work monitoring the market. Was this the original purpose of DCA?
  4. The bulk of the move takes place in probably 2 weeks most of the time. He is equally likely to missed out on big gains and big fall.
  5. Since 2001, Singtel have not cut its dividends. 70% of its returns are in the form of dividends. Will it make sense to missed out on these dividends?

What do you guys think?

I am sure there is no right or wrong answer to this but perhaps we can take this as a case study and put yourself in the shoes of my relative

  1. Tell me what you are likely to do
  2. Why do you take that route

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Nagappan

Tuesday 15th of May 2012

A Bear-market a God-send for a DCA investor. When the market and stocks go down and down I would even consider doubling my DCA allocations for that month! It is supposed to be cheap-sale time guys. When the market goes up again, as it surely will, you will see what I mean.

Temperament

Friday 23rd of September 2011

Hi Drizzt, DCA? No i never use DCA. i use value down cost averaging only in bear market's shopping.

Temperament

Wednesday 21st of September 2011

Hi Drizz, Pai Sei. My value average down "technique" really needs a lot of improvements. i am going to try value pyramid up which is recommended by most financial authors but none really recommended value average down. i consider average down or up as a form of "money management" in buying and selling of stocks because i really don't know what the market going to do next even after i have done some quite suitable homework for my standard. Some input maybe from you, you know. Thanks.

Yes, the irony of a extreme bear market (2009) gave me the highest dividends ever, because i was "fully invested". For me it was about 64% of my $$$liquidity then. Since then till now, i also has taken some profit. In fact i have sold about 40-45% of my equities.

i think the best way to invest is you don't have to depend on the markets for a living. Then you will have the freedom and the wisdom to invest in the most "ROI" instruments of the time. If you can't find anything worth-while, just enjoy your health and wealth with family or kins.

i am aiming for this "style" of investment recommended by one of your post,i think in 2006 or 2008. In other words, if i can achieve this standard, most probably i am really 100% financially free. And thanks for your postings. Cheers!

Drizzt

Friday 23rd of September 2011

Hi Temperament, i think the health and family portion are the real gain here from your post.

I see you are very asset light now. I am about 20-30% invested. I don't subscribe to dollar cost averaging anymore cause i feel if you want a dumb down way of investing, investing a fixed sum quarterly or yearly may not make that much of a different then monthly if you extrapolate longer.

Temperament

Tuesday 20th of September 2011

Hi, How come my email is always there even though i have signed out

Jared Seah

Tuesday 20th of September 2011

Drizzt,

Giving financial advice to "relative" is just "eat energy no peach good".

Like what you have discovered - you have seduced him to telcos...

Perhaps you can turn the 5 essential points to very gentle questions to your relative instead? Timing is everything! If he not receptive, probably he/she still blames you for recommending telcos!

Let your relative figure out for himself why he is using DCA in the first place. If he decides to market time, who are we to say he can't do it?

Who knows? One day you may change your mind about telcos and recommend REITS to your relative in future?

Do we know all the answers ourselves?

Drizzt

Wednesday 21st of September 2011

Hi Jared, and that is the purpose of this post, because it is to draw him to compare against what other human beings will do in that same situation.

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