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.
Hi Finance Smith,
The STI hasn’t even breached it’s historical high of 3,800 yet; its Price-Earnings is <12 and you're already selling!
I thought your prior plan to increase your monthly DCA when the market is depressed made sense. But decreasing your monthly DCA and selling for just a 10% profit seems quite sudden. As a percentage of salary the amount you're investing every month is low and only getting lower as your salary rises.
I'm an avid reader of your blog, am a few years older and currently have a sizable amount invested and am also doing DCA every month. For every one of my share purchases I have a target price based on PE/PB/beta and if the share reaches it then I sell. There's no second guessing because it was planned when I first bought the shares. For the DCA portfolio I do not touch it besides increasing the monthly investment as my cash allocation gets too high because it's for long term – I think of it as collecting dividends at higher yield than bank interest rates and knowing capital will also appreciate over the long term (10+ year timeframe).
Just thought I would share my perspective with you because it feels like you're trying too hard to time the market without a plan. Luckily you're saving a lot every month so probably still on track for a solid retirement so if it helps you sleep at night then great!
Regards,
Charles
Hi Charles,
Haha, yes, I have to apologise for flipping my positions back and forth. I can be quite indecisive that way, which is bad for investing. It’s a weakness I’m still trying to improve on. Good to know you are still reading my blog despite its inconsistency! Haha.
I agree with you on the points you raised and that’s a good investment plan you have. I still believe in DCA but I just can’t bring myself to invest so much per month at such pricing levels. Especially when I started investing more using DCA not long ago. Things might be different if I had started earlier. Anyway, I see no point in raising my average purchase price when I still have enough time to wait for lower prices before investing more.
Thanks for sharing your perspective and I appreciate it. Yes, I also feel like I’m overthinking and trying too hard to time the market without a plan. Let’s hope I made the correct call doing this rebaselining of my DCA!
Cheers,
John
Hi John,
As long as you have defined what pricing levels are fair to you and what you will do when the price reaches those levels.
STI ETF statistics as of 23 Jan 2018:
Distribution Yield – 2.78%
Price/Cash Flow – 12.25
Price/Earnings – 11.80
Price/Book Ratio – 1.37
What level is attractive to you?
I think it’s best to define target price levels based on some kind of value metric.
If defined based on a price alone there’s price anchor risk. Singapore GDP has grown from 100b (20 years ago) and 200b (10 years ago) to 300b usd and income and company balance sheets have followed. It wouldn’t make sense to lock in price levels from 10 or 20 years ago.
I think current Singapore price levels are fair and have not reached oversold levels. The recent rise only brings the index from undervalued closer to fairly valued in my opinion.
Anyway good luck to you. Hopefully you can get to a point where you’re comfortable with your strategy!
Regards,
Charles
I’m probably being biased based on pricing alone since the price levels were more reasonable just 2 years ago. But I guess you are right in pointing out that it’s a matter of the price levels reaching fair value based on the statistics you highlighted. Haha, yes, I hope I get to a point where I’m comfortable with my strategy too. Thanks!
Hi!
Will you be re-balancing your Stashaway and Smartly investments as well?
Hi,
Nope, I will continue to maintain my monthly investment amounts in StashAway and Smartly. These robo-advisors invest in foreign ETFs with mostly international holdings and I invest S$1,200 with them monthly. I’m just rebaselining the monthly DCA of the Singapore ETFs to S$1,300 so it’s roughly the same.