Why Dollar Cost Averaging (DCA) might not be the best option for you
I have heard of many reasons why there are some financial experts or gurus highlighting dollar cost averaging in your investment journey, like investing in a fixed amount of cash every month. Here are some reasons why DCA might or might not be the best option for you.
DCA is good for the following reasons:
1. It is a form of forced 'savings', it automates your investment journey, and is ideal for someone who does not want to spend time looking or researching about their investments. This can also remove the emotional portion of investing.
2. It is an excellent form of building out your position in a stock if you feel that the stock is overvalued at this current moment, and you are not sure if the stock will keep going up or go down once you get in it (we all experience that sometimes).
For example, lets say you want to build up an entry position in SE, and at current valuations it seems very overvalued according to normal market matrices. You can choose to split up the total amount to be invested at regular intervals by DCA-ing, for example 20% in week 1, another 20% in week 2 and so on. This is good in building out a position because if the stock goes down, you are effectively averaging down on your cost price. If the stock price goes up, your average cost will go up, but not go up too much also because you are splitting up your purchases.
DCA is not good for the following reasons:
1. Since purchases are made at regular intervals, there are some investors that feel that they do not need to do proper diligence and research when selecting their investments. Therefore, in a sense, it makes the investor lazy to do the proper research and planning.
2. DCA does not allow you to respond appropriately to market conditions. Over long periods of time. the market generally goes up. As such, in certain scenarios, investing a lump sum would be better during market corrections and crashes, instead of DCA-ing. Of course, this is easier said then done as there are scenarios of insufficient cash, or the factor of fear etc. For example, investing during the covid-19 crash would have paid off handsomely if a lump sum was put into the S&P500 during the Mar20 crash.
What I choose to do:
1. I have stopped dollar cost averaging into STI ETF since 2018 as I do not think that it is a good index to DCA into as the key constituents of STI ETF have not performed well, and many are in declining industries, which are facing headwinds. Many of these supposedly blue-chip companies are facing limitations to grow as they are focusing on the Singapore market, which hinders their ability to grow their revenues. If I have an option, I will focus on international markets like China (ticker: 3067.HK) or the US (ticker: CSPX).
2. I have decided to take on a more active role in investing by doing research on stocks and also strategizing on my entry prices (depending on market conditions), instead of relying on DCA only.
For readers who want to reach out to me, you can email me at jjfinancialblog@gmail.com
Take note: I am not a finance expert. Whatever that is documented in this blog are simply my opinions and does not constitute financial advice. Please do your own diligence and do not follow my advice blindly.
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