Sunday 22 April 2018

Investing cautiously through STI ETF?

I came across an article on the INVEST section of The Sunday Times issued on Apr 15, 2018 that wrote about a simple strategy proposed by Warren Buffett and that simple strategy is called dollar-cost averaging. The articles starts by writing that many of the conversations that the author Sean Cheng had with investors over the past few years has been about worries about a stock market crash coming soon.

 However, it has been shown instead that over the past few years, no major crash occurred and instead, the stock market has performed quite strongly. He then brought in the strategy of dollar-cost averaging by mentioning that it is impossible to time the market. I like that he had three different charts in the article. Each chart showed a different situations of the stock market, declining, U-shaped and a rising market. He then showed a comparison of dollars-cost averaging (DCA) and lump-sum strategy during the different situations of the stock market.

Taken from The Sunday Times. Apr 15, 2018

The charts showing a declining market and U-shaped market showed that a DCA method was better for these 2 situations while a lump sum strategy would be better for the rising market. The lump sum method is better in rising market situations and usually over the long term, the stock market would usually look like chart C due to increasing demand for goods and services. Fluctuations occur over the short term and if you would like emotional stability, a DCA strategy is a good option as you are able to invest more when prices are lower.

After reading this article, I find it good read in explaining the options available. However, there are still factors that are involved that can affect your eventual P&L. First, the lump sum strategy really depends on when you enter the market. Entering at an approximate low would most definitely be best however, entering at a high would put you in a spot. The lump sum strategy is very dependent on the time and price you enter. Next, a DCA strategy has it's pros but also cons. One disadvantage is that you would incur more commission charge. This can be a huge disadvantage over the long run. Well, both DCA and lump sum strategy has both it advantages and disadvantages, it has been and will always be a debate topic as each has it's own benefits. It really depends on the individual itself who is investing. So, which do you prefer? Or are you adopting another strategy?

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