Sunday, 13 March 2016

ETF investing via Dollar Cost Averaging vs. Standard Chartered

Dollar Cost Averaging (DCA), or sometimes referred to as Constant Dollar Plan, is an investment approach of buying a fixed dollar amount of a particular investment vehicle (typically an index fund or exchange-traded fund) on a regular schedule, regardless of the asset's price. As the amount of money invested in each interval remains constant while the market value varies, it systematically buys more shares when market is cheap and vice versa. This simple yet powerful strategy free investors from committing excessive amount of time and effort to monitor the market, and ease the burden of timing market entry. 

There are various options available that allow you begin your DCA portfolio. The more popular ones include POSB's Invest-Saver and OCBC's Blue Chip Investment Plan. Both enable you to invest in STI ETF for as little as $100. 

Increasingly, there are also people who try to mimic DCA using Standard Chartered (SC) Online Equities Trading. Enticed by the extremely low brokerage fees (0.2% compared to 1% for Invest-Saver), this group of investors buys a fixed number of shares at regular interval. At first glance, it appears that SC offers a cheaper alternative to POSB and OCBC's constant dollar plan. However, by buying a fixed number of shares using SC, it loses the powerful mechanism of buying more when the price is cheap.

In order to assess how the trade-off weight against each other, I constructed 2 portfolios based on POSB Invest-Saver and SC 'fixed share plan'. To ensure comparability, the set up of the 2 portfolios are as follow (you may ignore this part unless you want to scrutinize the methodology):

In the SC 'fixed share plan':
  • One lot, or 100 shares, of STI ETF (ES3.SI) were purchased on the first trading day of each month beginning Jan 2008.
  • Fees of 0.2325% (brokerage + market fee) were incurred for each transaction
  • All dividends were included
In the POSB Invest-Saver:
  • $301.30 were invested on the first trading day of each month. The investment amount was selected to match the investment cost price of the SC plan as of March 2016.
  • 1% sales charge was incurred on the $301.30 each month 
  • Residual shares were removed
  • All dividends were included
The chart below compares the performance of the 2 portfolios.

*Click to enlarge

The chart shows the value over investment cost (portfolio value  minus cost price of the shares) of the POSB Invest-Saver (blue) and SC fixed share plan (red). The good news is that both portfolios have grown substantially over the cost price. As of 11/03/2011, the Invest-Saver portfolio value is $37,202.92, while the cost price is $29,970.97. What's interesting is that, despite the much lower fees of SC, it failed to outperform Invest-Saver. This illustrates the power of the cost averaging mechanism. In addition, the convenience of investing via POSB Invest-Saver far outweighs having to manually trade using SC Online Equities Trading. I can also imagine investors who are using SC will be more likely to be swayed by market sentiment. After all, how many people dare to buy when they are surrounded by gloom and doom?

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