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Tea with Matthew Seah: Dollar Cost Averaging and expected returns.

Sunday, August 18, 2013

Although many have asked questions on which investment account is better, no one has asked about the expected returns from opening these accounts.

I feel that knowing the expected returns is as important as educating readers on the pros and cons of opening an investment account with POSB/OCBC/POEMS.

Thus, I have created a spreadsheet for readers to use:
https://docs.google.com/spreadsheet/ccc?key=0AtcoupwJgDW_dG1FRDRTSmtEcU9JcEliZzFwRFJqa1E

Below are the assumptions made in creating the spread-sheet:

1. Investing commenced since inception of STI ETF (ES3).

2. Investing is done on the last trading day of each month at closing price.

3. Fees are charged according to non-promotional rates as stated in the FAQs.
(POSB and OCBC are currently having limited time only rates before reverting to the normal rate.)

4. Fees are charged on investment capital used in buying the shares.

5. Dividends are recorded on 'Record Date.' (A fee is charged on the dividend received using POEMS ShareBuilder Plan, thus the dividend received is lower compared to the banks’ accounts.)

Why use STI ETF?

STI ETF has been around for a longer time (11 April 2002 - amended-) than Nikko AM STI ETF (24 Feb 2009). At inception on STI ETF, STI at 3344.53 was nearer to the all-time high of 3889.68 than STI’s value at Nikko’s inception date. Thus, STI ETF will give a lower and more conservative long-term return as investing starts near the peak as compared to investing in Nikko which started near the bottom of the recession.

Why last trading day of the month?

I don’t think there is much difference over the long-run with regard to the day in which to invest. Last trading day is just my preference.


Fees as charged?

The promotional rates of POSB and OCBC do not last indefinitely. Thus it would be more accurate to use the normal rates instead of the promotional rates.

Dividends are recorded on the Record Date as that is the date when your shareholding is confirmed by the manager. Since my purchases are at the close price, when the Record Date coincides with my purchase date, the dividends received are based on the pre-purchase number of shares.

I used Internal rate of return (XIRR function), which gives a more holistic measure of the true annual return as opposed to Compounded Annual Growth Rate (CAGR), which does not account for capital injection after the initial investment.

What you need to do is input your desired monthly investment amount and you will be able to see the total return and XIRR since 10 Jan 2008. On top of that, you can also compare the returns across the 3 different regular investment plans by looking at the "Overview" section of the first worksheet.

As mentoned, 10 Jan 2008 is near the all-time high for STI, so the simulation can show how the investment plan would perform when u buy near the peak of the bull cycle. Since we are near the 2007 peak, we can justify that the performance shown is close to what one would get for an entire economic cycle of bull and bear (similar to the peak-to-peak or trough-to-trough of a wave signifying one full cycle of the wave).

I feel that this is as close as we can get to determine the potential of the investment plans through an entire economic cycle (though the current bull market has yet to become a full fletched bear).

Please note that past performance DOES NOT guarantee future results.

Related post:
Tea with Matthew Seah: POSB Invest-Saver Account.

16 comments:

Kyith said...

You probably picked the wrong period. Had it be a few month earlier the annualized results will be much much lower.

I have a post on this oh shit! what if i DCA to STI ETF at an all time high!

This is using a much more expensive cost. the cost of this is 2.5%!

But also note, the dividend rate of Nikko is lower and expense higher. your results may differ

Cory said...

Well is still an interesting finding.

Matthew i am wondering what if we do a trough-to-trough analysis ? Say Aug 1998 to May 2003.

Matthew Seah said...

Hi Kyith,

I just realised I made a mistake in the inception date. Apparently yahoo only has the historic price up till 10 Jan 2008 and I thought that was the inception date of STI ETF.

You have 9 additional data points which I have just added into my spreadsheet. Apparently, the returns became even higher!

Since your cost was 2.5%, the returns would likewise be lower. I do have 16 additional data points after 30 Apr 2012 (the last data entry on your post), while the end value is similar (3.22 vs 3.23), I do have 2 more dividend payout which contribute to a higher return.

Check out the revised version, split adjusted here

I do agree that Nikko has a lower dividend and higher expense. Thus, I reckon the result to be around 1% lower.

Matthew Seah said...

Hi Cory,

Can you provide me with the historic price data? Yahoo only has historic price from 10 Jan 2008.

Matthew Seah said...

oops realised my mistake.. now everything should be in order

K H Tan said...


Hi, is it possible to do a comparison using nikko sti etf data under ocbc bcip and spdr data for poems ?

In practice, the two etf have diff cost structures and tracking errors. Hence I thought such a comparison might be better.

I am aware the nikko etf is much younger, hence the period of comparison could be from it's date of inception in 2009 onwards.

Thanks in advance!

Matthew Seah said...

Hi K H Tan,

here you go:

Nikko AM STI ETF Simulator

Kim said...

Hi Matthew

So let us say if we can always accumulate a sum to invest, which is better? SPDR STI or Nikko AM STI?
I read thru your post...a bit confused...sometime u mention Nikko is good....sometimes u said SPDR is good...sorry can help to enlighten ? Thank you

K H Tan said...

Hi Matthew, thanks for providing the simulator.

Some suggestions to improve the spreadsheet:

1) I noticed the monthly amount invested doesn't reflect actual practice. Meaning, in reality, if the fees were $x, and I have $1,500 to invest monthly, my actual invested amt would be $(1500- x). The spreadsheet assumes I would need to fork out ($1500+x) out of my pocket for the dollar cost averaging (dca) plan. In reality, the dca plan only allows for increments of $100, so there's a slight desync.

2) the spreadsheet doesn't factor in the dividend reinvestment (DRIPS) and monthly unused funds rollover that poems offer. (posb and ocbc doesn't offer these, but the DRIPS can be done by manually tweaking the amt to be deducted twice a year, everytime dividend is announced).

Ultimately, i m trying to answer these questions:
a) if I had $1,500 (or any other amt for tt matter) out of pocket to invest, am I better off investing in spdr sti etf thru philips sbp or nikko sti etf thru ocbc bcip ?

b) Does the answer also depend on the amt one is able to fork out per month ?

I realize this is not a apple to apple comparison and hence not easy to build a spreadsheet. Appreciate your help.

Once again, thanks in advance!

phion wong said...

Thank you Matthew for the simulation spreadsheet. Its been very helpful to me and i shared it with my friends.

I am a recent fan of DCA with ETF and intend to made 50% of my investment portfolio that. The remaining 50% will be my warchest for opportunistic individual stock picking

Matthew Seah said...

Hi Phion,

I'm flattered. Glad my spreadsheets could be of some help to you and your friends.

All the best in your endeavours

P.S. Cool name you have, if thats a real name. haha =D

RayNg said...

Instead of use DCA, I use market Cycle Investing strategy to STI ETF.

Use popular indicator like 50/200MA and look for golden cross or dead cross .

In addition, we can also use index PE as a gauge to evaluate of the index is under or value value.

So, sometime I nibble and sometime I gobble (borrow AK's analogy).

I apply this strategy to Shanghai index via UETF SSE50China when the index is ~2000 point. It went up >45% last 6 months. :)

Matthew Seah said...

Hy RayNG,

Actively looking to buy at the lower end of the price range definitely increase your returns.

Your method is more active than those who do not have the inclination nor the time to monitor the market regularly.

Different strokes for different folks.

RayNg said...

IMO, the good old days of growth is 'gone'. Some gurus always quote STI index has 12% CAGR for the past 30 years. This is true when SG is emerging from 3rd world to 1st world economy.

Now, SG growth is reaching tipping point and its growth is ~3% (LHL said one).

So, to expect the STI to grow @ 10% CAGR for long term.... I think wait long long.

I think this apply to US economy as well.

I will bet China, Indonesia and other emerging market for DCA strategy.

WK said...

HI Matthew,
Was searching for 'spreadsheet' on ASSI and this showed up.
I am looking more of something that helps to track monthly buy and dividend transactions. Am a noob at excel- google searches show such complicated excel sheets.
Would you know of one that'a available? Simple one. Thank you.

Matthew Seah said...

Hi WK,

I use my own spreadsheet. But I think mine is complicated as it was created to address my needs.

Could you explain more on what are the requirements and stuff that you would like to see in the spreadsheet? Simple is pretty vague...

I can create one for you if you'd like.

Matthew

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