A reader emailed me asking me the difference between buying 1000 shares of one particular stock monthly and buying a fixed amount (i.e. S$3000) of a particular stock. The email exchanges got pretty confusing as you can imagine.
Simplifying the discussion, using this example - the difference between:
Option 1 - Buying 1000 shares of SPDR STI ETF (ES3) using Standard Chartered Trading Platform
Option 2 - Buying a fixed amount of S$3000 worth of SPDR STI ETF (ES3) using POSB Invest-Saver
He wanted to highlight to his colleagues that buying 1000 shares of the same stock monthly is not Dollar Cost Averaging (DCA). The concept of DCA seem to have confused some people.
Definition of Dollar Cost Averaging
Going back to basic and definition, DCA is the technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.
So Option 1, buying 1 lot of the same stock monthly is not DCA.
Any difference in terms of performance?
The conversation went on to compare the performance or trade-off of both options. To be honest, it did not really matter to me. Both options will mean growing your portfolio and that is more important.
Nevertheless, I just did a simple calculation without including the transaction fees, any other cost and dividends (See below).
So Option 1, buying 1 lot of the same stock monthly is not DCA.
Any difference in terms of performance?
The conversation went on to compare the performance or trade-off of both options. To be honest, it did not really matter to me. Both options will mean growing your portfolio and that is more important.
Nevertheless, I just did a simple calculation without including the transaction fees, any other cost and dividends (See below).
Good news is both portfolios have grown substantially over a period of 2 years
As of 30 March, the price of ES3 is S$2.88. Option 1 Portfolio is valued at S$72,000 and Option 2 Portfolio is valued at S$67.685. The good news is both portfolios have grown substantially over a period of 2 years.
So which is a better option?
The above is just an example based on a snapshot of 2 years. I personally feel the convenience of investing via (in this instance) Invest-Saver far outweighs having the discipline to buy 1000 shares of ES3 monthly via a trading platform.
With DCA, more shares are purchased when prices are low, and fewer shares are bought when prices are high. I believe not only in the power of DCA but also the simplicity in a product like Invest-Saver.
Would you start to time the market?
Would you miss out on your monthly purchases because of the higher stock price?
Would you stop buying according to your plan when the market starts turning Bearish?
Would you just forget to buy the stock for that particular month?
As of 30 March, the price of ES3 is S$2.88. Option 1 Portfolio is valued at S$72,000 and Option 2 Portfolio is valued at S$67.685. The good news is both portfolios have grown substantially over a period of 2 years.
So which is a better option?
The above is just an example based on a snapshot of 2 years. I personally feel the convenience of investing via (in this instance) Invest-Saver far outweighs having the discipline to buy 1000 shares of ES3 monthly via a trading platform.
With DCA, more shares are purchased when prices are low, and fewer shares are bought when prices are high. I believe not only in the power of DCA but also the simplicity in a product like Invest-Saver.
Would you start to time the market?
Would you miss out on your monthly purchases because of the higher stock price?
Would you stop buying according to your plan when the market starts turning Bearish?
Would you just forget to buy the stock for that particular month?
On top of my head, it sounds like the same but I guess discipline does matter for the latter (ES3). For most cases, it'll revert back to timing the market somehow.
ReplyDeleteB, i agree with you. If it is not an Index ETF, i will revert to timing the market too (I will not be accumulating the same stock (i.e. DBS) monthly). Having said that, some people just like the simplicity of not doing anything and many years later, seeing that they have build a reasonable portfolio.
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