This post is part of a series of posts that discuss about the STI ETF in detail. To access the other posts in this series, click here
There are other methods of choosing when to buy the STI ETF. Dollar Cost Averaging or in short, DCA is one such method. DCA is the buying of the investment with a fixed amount of money at regular intervals. This method aims to eliminate the guesswork of knowing when to buy the investment and emotions such as the fear of buying the investment. However, the purchase of the STI ETF is slightly different from that of unit trusts. This is because one can only purchase the STI ETF in terms of the number of lots as it is traded over the stock exchange as compared to unit trust, where one can buy it at any amount. For example, if the STI ETF is trading at $2.00, one can only purchase in terms of the number of lots i.e. 1 lot, 2 lots, 3 lots and so on and the contract value will be $2000, $4000 and $6000 respectively.
So how should one go about implementing DCA ?
1) Decide and set aside a sum of money at every regular period for the purchase of the STI ETF. Make sure that you are financially capable of setting aside this amount of money as this plan requires consistency.
2) Decide on how long that period should be. Do take note that the period should not be too long apart as this will decrease the effectiveness of averaging the cost of the investment. A suggestion would be every 2 to 3 months although that will depend on how much money you are willing to set aside.
3) At every regular interval, use the amount of money that you have set aside to purchase the STI ETF. It will be advisable to choose a fixed date at every regular interval to carry out the purchase. For example, one can choose the 1st day of every month or the day which your pay is credited into your account.
For example, the period that I have choose will be a 3 months interval. Assuming I am willing to set aside $1500 per month for the purchase of the STI ETF, I will have $1500 * 3 = $4500 for each period.
1st period
Asumming that the STI ETF is trading at $1.70. Since I have $4500 to begin with, I can buy 2 lots of STI ETF at $3400. Assuming the commission cost $30, I would have spend a total of $3400 + $30 = $3430. Thus I will be left with $4500 - $3430 = $1070 which I will accumulate over to the next period.
2nd period
Assuming that the STI ETF is trading at $1.40. Since I have a total of $4500 + $1070 = $5570, I can buy 3 lots of STI ETF at $4200. Assuming the commission cost $30, I would have spend a total of $4200 + $30 = $4230. Thus I will be left with $5570 - $4230 = $1340 which I will accumulate over to the next period.
3rd period
Assuming that the STI ETF is trading at $2.50. Since I have a total of $4500 + $1340 = $5840, I can buy 2 lots of STI ETF at $5000. Assuming the commission cost $30, I would have spend a total of $5000 + $30 = $5030. Thus I will be left with $5840 - $5030 = $810 which I will accumulate over to the next period.
You would have bought a total of 2 + 3 + 3 = 7 lots using a total of $3400 + $4200 + $5000 = $12600. Thus the average purchase price for one lot of STI ETF will be $12600 / 7 = $1800.
In this way, you will be able to average out the purchase price of the STI ETF and reduce the risk of putting all your capital at the peak of the market. You will also be able to achieve a positive return for the STI ETF if you are willing to hold the STI ETF since the STI will rise in the long run.
Currently, there is a DCA plan being offered by a local brokerage. You can click here to see a review of it.
Saturday, December 13
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Hi Kay,
ReplyDeleteWould like to post a question
if you use DCA for a period of say 10 yrs, and you decide to sell it at 10th yr, would your profit be
= dividends + ave buying price-selling price ?
And another senario,
If you use DCA, plus re-investing the dividends, would your profit at 10th yr be
= ave buying price - selling price
In the second case, would it means that your profit might be lesser if the difference between ave buying price and selling price is small?
Hi,
ReplyDeleteI'm not sure if I understood your question correctly. Generally, the profits would be the average buying price of the number of lots that you are holding minus the selling price.
If the dividends are reinvested, your profits should be higher since the number of lots that you are holding onto will be greater due to the reinvested dividends, if the selling price is the same as in the scenario in the previous paragraph.
Thus your profits may not be lesser due an increase in your holdings as a result of the reinvested dividends even if the difference between the average buying price and selling price is smaller.
Kay
Hi Kay, do you know which other brokers offer dollar cost averaging similar to POEMS's SBP? Thanks.
ReplyDeleteHi,
ReplyDeleteTo the best of my knowledge, the only local brokerage that offers a dollar cost averaging plan is Philips Securities.
Kay
Hi Kay,
ReplyDeleteThanks for your Blog about investment. It is very clear for newbie like me.
You mentioned" You will also be able to achieve a positive return for the STI ETF if you are willing to hold the STI ETF since the STI will rise in the long run." My question is that will the STI index keep going up in the long time? what are the factors that will cause the STI Index to go up?
The STI Index now is about over 3100 points; I think it is quite high?
Hi,
ReplyDeleteNo one knows for certain whether the STI index will keep going up in the long run. But the past few decades has been a good example. In the long term, the stock market measures the health of the economy. So if the economy continues to grow and not be stagnant, say in the case of Japan, the index should go up in the long run. IMHO, the STI at 3100 points is a bit too high. But it is not too high given that the last high was at 3900 and usually, the STI will break new highs in the future.
Kay
Best etfs investing 2021 I would like to say that this blog really convinced me to do it! Thanks, very good post.
ReplyDelete