Friday, 16 September 2016

Have I been Value Cost Averaging

I was rereading my post on how we index invest every month and feeling pleased with myself about finally having a detailed post on index investing. I have always thought this is a suitable strategy for people who:
  • Are not interested in research and analysis of shares
  • Don't have time to build up knowledge on shares investing
  • Are okay to have the market rate of return on their investment portfolio

It's just a matter of doing the initial set up of the automated and manual processes to index invest every month and you are good to go. These are the major decisions to be made:

What I like about writing on my blog is I get to convey & defend my positions while challenging my assumptions. This is the case especially when I make mistakes since that's how I learn.

I have been going on for a while now about how I use the Dollar Cost Averaging (DCA) approach for index investing. This involves investing a fixed sum of money at regular intervals in index ETFs. Which is the case for my monthly POSB Invest-Saver investments in the Nikko AM Singapore STI ETF (G3B) and ABF Singapore Bond Index Fund (A35).

The problem is I don't invest a fixed sum of money at regular intervals for the rest of my Vanguard index ETFs and SPDR Straits Times Index ETF (ES3). I actually invest more when the prices of the index ETFs fall & less when prices rise and I called this a modified DCA approach.
Turns out the accurate term to describe this should be the Value Cost Averaging (VCA) approach. I have no idea why I have not heard of the VCA approach before but it's probably because I haven't been reading widely enough. I only recently came across it after reading related articles to the DCA approach on Investopedia.

Basically, the VCA approach involves making investments based on the total size of the portfolio at each point rather than investing a set amount each period. By investing more when the prices of the index ETFs are low, you can achieve higher returns over the same time period.

The VCA approach has a more active investing aspect to it while the DCA approach has a more passive investing aspect to it. Both approaches still help to minimise timing risk and I have been applying them to my index ETF portfolio.

I would be interested to see which approach works out better over the long run. It's going to be difficult to do so with my portfolio because both approaches are applied to different index ETFs. Besides, the amounts invested under each approach are different and there's also the matter of how disciplined I am & how well I apply them.

There's nothing quite like finding out I have been banging on about the DCA approach without realising I have also been using the VCA approach. It's humbling and a good reminder that there is so much to learn & always remember never to be full of yourself.

1 comment:

  1. For the monthly investment by dollar cost average, the only drawback is the high commission charge by brokers in Singapore. This will eat up a lot of potential profit in a long term run.