AMA Christopher Tan
Asked on 22 Jan 2019
Hi anonymous, thanks for your question. There are A few parts to your question and so I will break it down.
I am a great believer in buying the Index. This is because, there are enough studies to show that most active managers do not beat the index after cost. Even if they do, they do not beat it consistently. As such, it is very difficult to pick a manager that can do it consistently after cost. And the point is, why do you want to take the risk to find a manager that cannot beat the market consistently if the market gives you enough returns to meet your goal? There is no need to take such risk. ETF is one way to invest in the index. However, while investing in STI is not a bad idea as we are familiar with the local market, STI is a very small market. I would prefer to diversify my portfolio with STI but definitely to bigger markets such as the S&P500. Investing into just STI may also expose you to volatility risk that you cannot accept and as such you get out of the market way too soon and thus not capturing the returns.
The thing about DCA is this, in a up market, DCA does worse than investing with a lump sum. And if you look at history of markets, the stock market goes up most of the time. However, as most of us may not have enough lump sum to invest at one go, DCA is not a bad idea.
However, the problem with doing DCA using ETF is cost of transaction. Buying ETFs incur brokerage fees and if your regular DCA amount is small, the cost of that trade becomes high and that eats into returns. If I want to do DCA, I will prefer that you invest into a low cost indexed fund or evidence-based fund as such Dimensional.
Long term is good. Short term is not investing, it is speculation. Over the long term, it has been shown that stock markets always go up. I think anything more than 10 years is reasonable.
This is something I cannot predict. What the markets can give really depends on many factors such as the future economy, population growth etc. However, I would say that 4-6% p.a from STI over 10 years is a reasonable expectation.
I think so. However, as mention in (1) above, do not just restrict yourself to STI. Do diversify across other markets.
Hope this is helpful!
Based on a personal research I did in 2017 using ES3 STI ETF returns from (10/01/2008 till 5/04/2017), the historical net annualized return for a person who did DCA across 10 years period is approximately 5+%.
This is based on the following assumption:
Transaction fee - 1%
87 set of data - based on 87 different start dates. I used daily share price to compute the returns.
Historically, STI ETF DCA can return 5-6% net return after fees. (Note: Historical performance does not equal future performance.)
However, to ensure that you can enjoy this type of return over the long run, the key is to stay in the market.
Across the 10 years period that I analyzed, the volatility across a 1 year period for DCA is approximately +/- 25%. Without proper understanding and planning of the investment, an investor may panic and exit the market prematurely when there is a market downturn. Therefore, it important for you to also understand the underlying risk and your financial situation to withstand the volatility you may face. The key risk here is not the losses you can potentially suffer but you exiting the investment early due to your emotions.
Using the DCA method on STI ETF through local bank can automatically deduct fixed amount from your savings. 4-6% return is much higher compared to bank savings account. It is one time setup and you can just leave it to compound. I think it is a good investment to diversify your investment.
23 Jan 2019