Thursday, 12 March 2015

Dollar Cost Averaging Model for the Long Run

All along I've been wanting to do about a write up on Dollar Cost Averaging (DCA) as an approach for new or busy people who are either not sure what to buy or have no time to monitor the markets. 

Good News for all! I just chanced upon this article written back in 2014, click here for link. I believe that this is a good method to enter the market if appropriately used. The only thing to take note is to use this only for instruments which will go up in the long run. So which instruments will go up in the long run?

Indexes of course! If you are based in Singapore, then mostly people would be familiar with the STI (or Straits Times Index) which tracks the market capitalisation of the top 30 Singapore companies over the different sectors. If you are based in other countries, like in US, you can invest in the Index of that country (like the S&P 500). Well, you cannot really just buy the index, you would have to buy the Index ETF through the stock market. The ETF can be traded just like any other funds in the stock markets. The only difference is that the Index ETF tracks closely to the components of the Index. Sounds complicated? I'll explain.

When you buy any fund, the fund managers will decide which stocks to buy and sell. Most of the funds fail to beat the market index (which is the reason why Warren Buffett is willing to make a million dollar bet against 5 hedge funds, click http://time.com/money/3725955/warren-buffett-bet-hedge-funds/ for the link). Those that do perform as well as the index will still lose after the fees are added into the calculations.

When you buy an Index Fund, the fund managers will adjust their stock portfolio according to the constituents of the Index. This means that they cannot choose what to buy or sell. They would have to follow closely to the stock market index. Most of the indexes do not switch out their constituents unless they have a better stock to replace (http://www.bbc.com/news/business-31761573 ).  So if you are buying the STI ETF, you will know that you are always holding the top 30 companies ranked by market cap in the Singapore stock market and any stock that is not performing as well will be replaced with the next best stock.

The only caution is that you need to choose the country you want to invest in carefully. You do not want to buy into a country’s index when you are unsure of the country’s future (if they get taken over or wiped out).

Investing Wolf 

Disclaimer: This is not a recommendation to buy or sell any mentioned stocks or securities in this blog. 

6 comments:

  1. Hi investing wolf,

    Actually the sti components are based on market cap, liquidity and free float, and not so much about the company's performance.

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    1. Hi LaPapillion,

      Thanks for the correction.(Too lazy to read the full list :P).

      STI
      This index comprises the largest 30 companies by full market capitalisation that meet stated
      eligibility requirements.

      For more information, do check it out at this link: http://www.ftse.com/products/indices/SGX-ST.
      Particularly, there is a column for "FTSE ST Index Series Rules" under the heading of "Methodology"

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  2. Hey Wolf,

    Have you heard of Value Averaging? After I learnt about it, I can never look at DCA the same way again.

    http://gotmoneygothoney.blogspot.sg/2014/12/book-review-value-averaging-by-michael.html

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    1. Hey GMGH,

      I have heard of many things... but i can't seem to recall if i have read about Value Averaging (maybe it is known by another method/ book that i read :P ). Will head out to look for the book mentioned and review.

      That being said, DCA is just meant for people who are new or busy people (too busy till "cannot" contribute time out to create their own wealth)

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  3. Hi Wolf,

    Much agreed. DCA is the fast and easy way for people to deploy cash that don't have the time for better strategies.

    I don't think you need to specifically read that book, although it gives a very complete explanation of value averaging. Probably just googling around can find you good explanations of the method!

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    1. Ohh... this seems like a new topic to me... :D.

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