Last week, I compared DCA monthly with Buying the Dip. As mentioned in the video, the results is not conclusive as it involves only one time frame – what happened over the last 10 years. However, there are some interesting observations.
Even with this small amount of data, the outcome depends on the index that you invested in and the invested time frame. Most importantly, there will be variance to the theoretical numbers as we are unlikely to execute either of the methods consistently over long period of time.
While I was curious to do the comparison, I personally do not practise DCA or simply buy the dip. I will share in this post why this is so.
Why I don’t practise Dollar Cost Averaging
I am an active investor who pick stocks
“Dollar-cost averaging involves investing the same amount of money in a target security at regular intervals over a certain period of time, regardless of price.”
– Investopedia’s article
While the above statement indicates a target security, I do think that DCA is a more appropriate strategy for passive investing into a diversified ETF. As an active investor, it is not easy to use DCA strategy. Imagine having $1k to invest in a month, how should I deploy this $1k to my different counters?
- I would not even be able to buy one lot if the counter is trading more than $10 per share.
- Also a single trade would have a fees of more than 2.7% if I am going to keep it in CDP.
So this might only work if I am using a low cost brokerage for US shares. Given that I started with Singapore market and still have bulk of my portfolio in it, DCA just does not make sense.
I have been getting reasonably good return
For the longest time, I was a frog in a well and only invested in Singapore market. So getting a better return than the index was really quite easy. In short, with a much smaller portfolio, I was able to get an average annual return of above 10%.
It was only about 5 years ago that I was out of the well and started to invest in US market. What an exciting journey it has been since then. Beating the index is definitely a lot tougher! Base on the latest data, my portfolio is 15% behind SPY!
However, this gap only came about this year. In fact, at the start of the year, I was still on par with SPY! This can be largely attributed to the weak performance of semiconductors and electronics counters such as Micro-Mechanics and Venture. Also, with the higher interest rate weighing down on REITs, their performance have been dull for the year too.
I do not know if I could catch up SPY in the future, but as long as I am able to achieve my goal, then I will continue active investing.
I enjoy investing into individual companies
Whether studying or working, most of us specialised in one to two fields. But there are so much in this world to explore. So investing in individual companies provided me a window view of other businesses. No doubt what I learnt will be superficial, but that is sufficient to satisfy my curiosity.
Hence, back to the previous point of even if my portfolio does not perform as well as the benchmark, I am not going to switch.
It probably sounds cliche but just like I did not work just for money, I am not into investing just for the return too. As I have mentioned in an earlier video, doing something that I like helps me to sustain my effort, and that leads to reasonably good results.
My belief lies with the business fundamentals and the people behind it
Which leads to this final point why I don’t DCA into SPY, even though theoretically it might give me a better return. When investing in a business, my belief lies the business fundamentals and the people behind it. This allows me to hold on to my shares during a bear market or when the business does not do well periodically.
Investing in an ETF means I need to believe in the economic of the country? Or simply the history of the market? Maybe it’s just me, but I find that harder to do. Hence, I can imagine that I will feel my fear or greed a lot more. Then I am likely unable to execute the plan, no matter if it is dollar-cost averaging or buy the dip, resulting in me not getting the theoretical return.
Why I don’t (simply) Buy the Dip?
I believe in time in market more than timing the market
Based on my experience, I am really bad at timing the market.
Learn to reach the chart?
I do think that might improve the entry/exit point if one is skilled. However, second guessing the herd’s emotion just does not appeal to me.
Which means I do not just buy when the price dips, I might even buy when the price appreciates as I continue to think that the business is undervalue in the long term. Of course this also means that if the price really dips, I might not have the money to buy.
I have sufficient allocation in my portfolio
Just as conservative asset allocation helps me to stay calm when market plunges, position sizing helps me to limit the damage of any incorrect decision. No matter how confident I am of a company’s fundamentals or prospect, there are many things that I don’t know about it.
As the Chinese saying goes, “不怕一万，只怕万一。”
In essence, there is always a need to prepare for the unexpected.
I do not have a hard number that I follow mechanically and the maximum position also varies with the confidence that I have about the company.
For reference, OCBC is my largest position and it occupies about 10% of my portfolio and I am comfortable with that.
It is important to gain knowledge of what we are doing. It is even more important to be able to apply the knowledge. Most importantly, we need to know ourselves. It is only then that we will be able to adapt the various strategies to our advantage and achieve our intended goal.