Dollar Cost Averaging (DCA) refers to the method of investing a fixed amount of money into a particular investment at a fixed interval of time. For example, investing $500 monthly from your Supplementary Retirement Scheme account into Exchange Traded Funds (ETFs). By using the DCA method to fund your investments, it mitigates timing risks and prevents you from making the investment decision based on emotions.
This method is suitable for beginners who are starting to dabble into investing and have a low capital. With a low level of knowledge in investing, DCA is the best way to start as it is not easy to predict the best timing to enter the market.
Pros and cons of DCA
DCA allows individuals to invest in more stocks when the prices are lowered and fewer stocks when the price increases. This averages out the cost of investment products during a period of fluctuations. Additionally, the DCA strategy also keeps you in check during periods of market volatility, lowering the risks of rash decisions.
New investors tend to prefer the method of DCA due to their low capital. Most of the regular savings plans in Singapore start from $100 per month. The lack of knowledge in investments also makes it less risky when using the DCA method as compared to doing a lump sum investment.
On the flipside, using the DCA strategy might incur a higher transaction cost. For instance, a brokerage charges $5 for every deposit or withdrawal made, and you are investing $500 monthly. This translates to a 1% transaction fee for every monthly deposit. Thus, it is important to check for the transaction costs from the brokerage of your choice before starting an account with them.
Single lump sum investment VS DCA
Another method of investing is to have a single lump sum investment into a particular investment product. This method is viable if you have a large sum of money which will not be used in the near future. The returns from lump sum investment could be rewarding if you have chosen to invest in the right product. However, it can potentially lead to short-term losses, leading to emotional stress.
Source: Morningstar
Looking at the graph above, the 2008 – 2009 financial crisis has resulted in a dip in prices. Ever since then, the US market has been in a bullish market with occasional minor dips. In this example, taking the lump sum investment approach during those two years will lead to a better performance than the DCA strategy. Investors who used the lump sum method will be able to recover from the price dip, provided that the shares are only sold after a long period of time.
Investment options for DCA
Regular Investment Plan
Dollar Cost Averaging into a Regular Investment Plan such as DBS Interest-Saver allows individuals to invest in Exchange Traded Funds (ETFs) and Unit Trusts. The minimum amount to get started is $100 per month, and this can be automatically deducted from your DBS account on the 15th of every month (or the next business day if 15th lies on a non-working day).
Under DBS Interest-Saver, the transaction fee starts from 0.5% per transaction and it includes 4 ETFs and various Unit Trusts available. Their list of ETFs is:
- Nikko AM Singapore STI ETF,
- ABF Singapore Bond Index Fund,
- Nikko AM SGD Investment Grade Bond ETF, and
- Nikko AM-StraitsTrading Asia ex Japan REIT ETF
CPF / SRS Investment Plan
Contributions made to the Central Provident Fund (CPF) and Supplementary Retirement Scheme (SRS) can be used to purchase investment products. An advantage of investing using CPF and SRS is the higher returns than what the schemes offer (with a higher risk). Returns from such investments are not taxable as there is no tax on capital gains in Singapore. In order to invest using your CPF account, you must have at least $20,000 in your Ordinary Account or $40,000 in your Special Account.
To get started on Dollar Cost Averaging using CPF or SRS, you can consider financial companies such as Endowus, POEMS, and DBS. For Endowus, you will have to link your CPF or SRS account to your Endowus account and set a monthly investment instruction to DCA into your investment product(s).
Keen to start investing using the Dollar Cost Averaging strategy but unsure of which investment products to invest in? Drop us a message on our contact form or WhatsApp us here and we will get back to you shortly! Our personalised approach to your query will surely help you to kickstart your DCA investment journey smoothly.
*Link to SRS article.