Before entering this post, please pardon me and correct me for any mistakes that is written in this post. Two wise seniors have recently written on DCA for Singtel and I would like to take this chance to write about my thoughts on the DCA for Singtel. Both the post shared by them are very interesting post which triggered some thoughts of mine and I feel that their both their blogs (
B and
Uncle CW8888) has educated me well throughout my learning.
I would like this opportunity to thank them first before touching more on my post.
Both their blogs can also be found on my blog list located at the right panel on my blog and I've been a fond reader of their blogs for a long time.
Next up, Happy Chinese New Year to everyone that is reading this right now. Wishing everyone a blissful and healthy new year ahead and may everyone huat big big in their financial journey ahead :)
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So what exactly is DCA (Dollar Cost Average)?
A simple check on Google will bring you to the model definition here by Investopedia. Hence, please take a look at the image below:
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| From Google - Investopedia's definition |
Having that said, DCA is a passive way of investing and it is different from averaging down.
Now, there is many different ways that you can actually perform DCA that is available in the market such as POSB Invest-Saver (on Nikko AM STI ETF etc.), OCBC BCIP, Maybank MIP etc.
Such accounts provided by the different institutions offers a relatively low fee for you to perform DCA and not hurt your pocket badly due to the expensive brokerage fees when dealing with small lots. There is also limited selections available for such plans with exception to OCBC BCIP (where you can touch more on the blue chips) and Maybank MIP (which offers a wide range of counters for you to choose from).
A downside of such plans which I do not particularly enjoy is that, the shares purchased will be held under their custody and not deposited into your CDP account.
However, today's topic - DCA on Singtel. If one is to seriously do so and does not mind the shares being under their custody, you may wish to consider OCBC BCIP which charges $5 and Maybank MIP which charges SGD 1/1% for amount below S$1,000.
Now let's back to the topic.
In the case study conducted by B on DCA on Singtel which is done on:
1. A 10-year period from the peak of 4.22 on Oct-07 till today
2. DCA done when dividends is given by Singtel (Jan and Aug)
In the post shared by B, there was several people that had dropped by and commented that the DCA should be done on a fixed amount rather than fixed units, which is true to reflect the actual concept behind DCA.
Another thing I felt is the interval/frequency of performing the 'DCA'.
As the frequency (Jan & Aug), twice a year is relatively small. I feel that the DCA concept is not well made use of. To improve on the model slightly, I have done a tweak and had increased the frequency DCA is performed on Singtel.
On a side note, I've believe that the prices during the CD/XD period or weeks due to release of it's financial report are slightly irrelevant as the volume during such periods are relatively higher due to the increased speculators that are on board or shorting it in anticipation of it's result, which does not reflect it's prices well, hence explaining the increased frequency.
Thus, with the increased frequency, I believe that the DCA concept can be better make used of.
In the table below, I've controlled certain parameters for this exercise which is listed as such:
1. Amount of S$500 in each purchase.
2. An interval of 2 months between each purchase (ie. 6 purchase/year)
3. Purchase conducted on first of every month (Aside first purchase of 4.22)
4. Dividends reinvested
Unchanged factor is:
1. Buying at the peak of 4.22 (10 October 2007)
2. Starting and Ending Duration (Oct-07 to Feb-18)
3. Price as of 17 Feb at 3.33
Note: Dividends for Jan will be added to Feb's amount for dividend reinvestment
The list ahead is very long, hence, please pardon me once again:
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As shown in the 3 images above, here's some conclusion:
I will round the total units to the nearest purchasable lot on SGX (Singtel10, Z77):
From the above set of data, we will derive with a P/L of $10,424.70
This translates to a P/L of 33.09%
However, this will only happen if your dividends are reinvested.
If you notice, the P/L (dividends) I've labelled is negative. This is because the amount of dividends received at $11,406.13 is more than the the P/L of actual value $10,424.70. Which in another words, the recent price movement has caused the returns to be lesser than the original dividends received.
However, you're still sitting on a profit of 33.09% based on your capital of $31,500
Two flaws represented by this set of data are the odd number of lots during each purchase and transaction fees that is excluded and definitely the chances of having your orders fulfilled.
Allow me to rectify these flaws one by one:
Adjusting the units purchased each time to the nearest 10 unit which can be purchased from the market (Singtel10, Z77). We will have $883.86 lesser in capital injection. This will result in lesser dividends receive, lesser total units and higher average price. This will impact directly onto our returns for this activity. The updated tab now tells me that we will have an average price of $2.58 compared to the earlier. I will not be sharing the lengthy 70 odds column of data in the second example to avoid further confusion.
Nonetheless, you're still sitting on a P/L of 29.19% based on your entry price.
Next part, transaction fees:
Example 1:
Now let me play with the transaction fee (assuming that all these trade are executed by using the big brokers available around.
The average transaction amount across the 10 years comes up to roughly $681.05
Taking that amount into consideration for the transaction fee imposed by the brokers around $25 + 0.0075% (SGX Access Fee) + 7% (GST) + Clearing Fee, we will derive with a sum of $27.04 for each trade.
Total Transaction Fees = $27.04 x 63 sessions = $1,703.52
Now, this is massive transaction fees and it eats into the profit by nearly 20%!
Nonetheless, having that said, We're still positive!!
Our new P/L with transaction fees in will come up to = $10,424.70 - 1,703.52 = $8,717.18
This will translate to a P/L of 27.67%
This work out to an annalized return of 2.9%
I do agree with B that this is nothing to shout about compared to our CPF OA account at 2.5% and not forgetting our SA. The key difference here is the liquidity and availability of the funds.
Total Duration = 3785 Days (10 Oct 07 - 19 Feb 18)
Example 2:
Average Transaction amount across 10 years: $662.12
Average Transaction Fees: $27.04
Total Transaction Fees: $27.04 x 63 = $1,703.52
P/L = 9193.48 - 1703.52 = $7489.96
P/L (%) =
23.77%
This work out to an annualized return of
2.15%, which is lesser than what our CPF account is able to provide us.
Finally, in this exercise, I would now conclude that:
1. Compounding interest is really the 8th wonder of the world.
2. Panadols are indeed effective in this exercise
3. DCA is not a scam but a passive way of investing
4. Transaction fees does matters in this higher frequency and small amount orders
5. There is no foolproof method in buying stocks and that passive investing might not be better than active investing. Fortunately, for this exercise with Singtel, you does not lose out much.
Though this exercise, we see positive returns on both hands which might mean that this approach of DCA on Singtel
might be good on your portfolio, I do have some thoughts which I've left out in the lengthy post on top.
With the increased frequency in this exercise, we also managed to obtain
2 positive results as compared to the negative return on B's case
study. Adding on, with the dividends reinvested, we do see another
different horizon to amount of shares we hold as well as the P/L.
I'm sure that we will be able to find better companies for
this activity which I agree with B and Singtel is not bullet-proof despite Singtel being my greatest holding. We must remember that our
average price, entry price and exit price matters in each investment.
With this 12,000 odd units from this tweaked DCA in this past 10 years and dividends reinvested, we will be able to receive roughly $175/month of passive income assuming Singtel's dividend of 17.5 cents is maintained and based on the average price of $2.50, we are looking at a yield of 7%.
Indeed, the numbers is really attractive.
However, if you have purchased this 12,500 when it's $2.50 in Feb-09, the dividends you've received in this 10 year be added to the bulk of sum you see here, which you can look at it in 2 different glasses - you Singtel shares cost you $0.74 each ($1.76 dividends) and in 5 years time (assuming dividends maintained), these 12,500 shares of Singtel would be free of cost :)
See the difference now? :)
