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
- It acts somewhat like a force saving making you put aside the money
- It ends up as odd lots (since each time you buy so little shares) making it difficult for you to sell it off
- 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
- 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.
- 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.
- 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.
- 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
- I think my relative is market timing. Like me he thinks he can outsmart the market. He will have to get his DCA right.
- He is stopping his force savings plan. Is that desirable?
- He is doing excessive work monitoring the market. Was this the original purpose of DCA?
- 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.
- 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
- Tell me what you are likely to do
- Why do you take that route
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