I was corresponding with a reader over Facebook when I got asked this good question. Should he lower his monthly Dollar-Cost Averaging (DCA) investment amount for now given the current high pricing levels of the equity markets and subsequently increase it when the prices come down? My advice was that it’s a good idea since that keeps you vested in the equity markets but doesn’t raise your average purchase price as quickly while allowing you to lower it more efficiently.
That’s when I realized I have been doing the opposite of my advice. In my effort to utilize more of my cash holdings, I have been investing more every month but with the way equity markets have been climbing, this has been averaging up my purchase price consequently. Unwise because I don’t actually need to invest more now since we are still employed with salary income and not in a rush to achieve financial independence.
Besides, the more effective way to accelerate wealth-building is to invest more during downturns and bear markets to wait for the subsequent recovery. Not the other way around. Which is why I’m rebaselining my DCA. I have just sold quite a bit of my STI ETF holdings and lowered the monthly DCA investment amount. I won’t call it rebalancing because that would actually require me to invest even more of my cash holdings. Rebaselining is a new word I learnt from my workplace.
Its application seems to fit what I’m trying to do now. By selling some of my STI ETF holdings, I lock in the gains I have achieved so far with them. By restarting at lower monthly DCA investment amount, I don’t average up my purchase price as quickly. But having more room to increase my monthly DCA investment amount during downturns and bear markets allows me to lower the purchase price faster.
I’m starting to see how DCA cannot be applied in isolation as a set and forget strategy. This limits its usefulness especially when you don’t adjust the investment amounts according to the market swings. You have to make changes according to the market cycles. It works even better when you lock in the gains along the way. And I just found out from selling my STI ETF holdings through the bank monthly investment plans and trading platforms that it’s not as difficult as I thought it would be. Online trading has come a long way and it’s more convenient when your equity holdings are not custodised with the Central Depository (CDP).
Summary of STI ETF (SGX: G3B and ES3) sell transactions in Jan 2018
Sale proceeds: S$33,850
Profit amount: S$3,500
Profit percentage: 10%
Look out for my revised lower DCA investment amounts from next month onwards. It’s still the usual purchases for Jan 2018 since the changes are only going to take effect from Feb 2018 onwards. This also means the cash component of my portfolio is going to increase further. And I will be even more overweight on cash holdings. But since I’m in no rush to invest, I might as well take my time and wait it out for better opportunities.