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

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.

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?

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.

Tea with Matthew Seah: OCBC Blue Chip Investment Plan.

I am constantly looking for people who are good writers and who have a savvy for investments. 

Some of you might remember reading an article about a young investor in the most recent issue of The Sunday Times. 

Matthew Seah is only 25 but what he has achieved is far more than what I did at his age.

I discovered the following Monday that I had actually been chatting with him for a few days already and that he is also a regular reader of my blog, having commented in a few of my blog posts before as well. 

I could not reconcile the Matthew who commented in my blog posts with this Matthew whom I have just started chatting with recently because I always thought he would be much older.

Well, I always say that I am a frog in a well. 

I just discovered (again) how small my well is.

I asked Matthew if he would like to do a blog post for ASSI and he kindly obliged, choosing to write a piece on OCBC Blue Chip Investment Plan. 

This blog post shows how logical he is in his approach and how sound he is in his ideas. 

I certainly hope that this is the first of many blog posts in ASSI to be penned by Matthew.





----------------------------------------------------------------------------

The Business Times reported on 25 Jun 2013 that,

“OCBC Bank announced today the launch of the OCBC Blue Chip Investment Plan ("the Plan"), a regular investment plan that allows retail investors to purchase Straits Times Index (STI) stocks for as little as S$100 a month.

Investors can use cash or, funds from Central Provident Fund (CPF) or Supplementary Retirement Scheme (SRS) accounts to invest in one or more stocks from a selection of 19 Mainboard STI stocks and one STI Exchange Traded Fund (ETF).

OCBC Bank also saves first-time investors the hassle of opening securities trading and Central Depository (CDP) accounts by buying the stocks on their behalf on a pre-determined date every month.

The 19 stocks were selected as they are included in the CPF Investment Scheme (CPFIS) from the entire portfolio of 30 blue chip stocks in the STI.”

For more details, see: OCBC Blue Chip Investment Plan

This investment plan is targeted at young working adults who do not have a lot of cash to buy one lot (1,000 shares) of blue chip. One lot of blue chips can cost somewhere between $600 (Golden Agri) to $43,000 (Jardine C&C). OCBC has kindly left out those STI components that are fairly affordable, stocks valued less than $1, as they cost less than $1,000 per lot to purchase.

This investment plan employs the Dollar Cost Averaging technique where you invest a fix amount each month, regardless of the share price.  Dollar Cost Averaging allows you to buy more when the price is lower, and consequently less when the price is higher.

Investopedia does a good job of explaining this technique: Dollar Cost Average.

What should a young working adult buy?

I am assuming the a young working adult to be enthusiastic, ambitious , full of drive. Thus, he/she would not have much time to do any due diligence when it comes to investing. He/she would not want to add more stress to his life by trying to beat the market. Trying to beat the market requires lots of control over your emotions, which might not be easy for a young investor who has not experienced the greed associated with rising prices, nor the fear associated with falling prices.

As such, I recommend investing only in the Nikko AM STI ETF. Investing in Nikko AM STI ETF would allow you to own all 30 STI components at once, hence eliminating the hassle of choosing the individual counter. Investing in the ETF also allows sufficient diversification to weather financial shocks to some extent.

The components of STI are reviewed semi-annually by FTSE Group to ensure that non-performing companies are replaced. E.g. NOL was removed from STI and replaced by IHH on 13 Sep last year. By investing in Nikko AM STI ETF, you can be sure that you are investing in the best 30 companies (or perhaps the 30 better than average companies) listed on the Singapore Stock Exchange.

While the Investment plan may be good, you should also consider the charges involved.

The charges involved are as follows: 

Click on pic to enlarge.

So the charges involved for investing each month is 0.30% or $5 per counter, whichever is higher. It might seem difficult to understand, but here’s a chart to help you.

Click on pic to enlarge.

As you can see, the fees are pretty high, at 5% when you invest $100 per month ($5 is higher than the 0.3%, thus the fee incurred in this case is $5). However, the costs involved is greatly reduced to an optimal 0.30% when you invest $1666.67 per month (In this instance, 0.3% is also $5) or more.

What this would mean is before you can even make any money, you will need to pay OCBC a fee of up to 5%. Whatever that is left will need to grow by 5.3% before any profit can be made (after paying 5% fees, you have $95 left. In order to get back to $100 using $95, the returns needs to be 5.3%). This kind of charges are the same when you open any other trading accounts, but the fees incurred may vary.
 

I feel that any fee below 1% of your invested capital is manageable as long as you are really holding for the long term. Hence please invest at least $500 per month if you are taking up the OCBC Blue Chip Investment Plan, and invest only in Nikko AM STI ETF for sufficient diversification.

See also:
1. POSB Invest-Saver Account.
2. Dollar Cost Averaging and expected returns.

Visit Matthew's blog:
Compounding for a better future.

Related post:
Inflation adjusted retirement income plan.

A capital question: how much to have or how much to use?

I remember reading a book titled "The Swiss Family Robinson" in my school going days.  It was one of many classics such as "Black Beauty" and "Call of the Wild".  

It is very strange but most people who are younger than me by just, say, 6 or 7 years have never read these books before.  Classics, they are.  Anyway, I digress.

The book in question is about how a family got shipwrecked on an island and had to to use whatever was available there to build a life for themselves and over time, they did quite well.  Very resourceful family.  The father would praise his children if they came up with a good idea by saying: "That's a capital idea!".  

I have yet to come across anyone in real life who would use the word "capital" in the same way.  It might be a very English or a very archaic usage since the book was written in the 19th century.  

Now, that brings me to the topic of this post: capital.  Specifically, capital for investing in the stock market.

Now to do my impression of Forrest Gump: 

"My mama told me that I must pick the right people when I want to talk about stocks which are undervalued as not everyone has the ability to buy."  

Very true but it is hard to identify the "right" people, you might agree.

So, there is an advantage about sharing ideas in a blog.  Visitors who come to my blog are probably interested in investing and making money in the stock market and probably have the means to do so.  

I hope I am right and not being delusional on this point though.

I like the saying that we can bring a horse to water but we cannot make it drink and I've had more than my fair share of horses which do not drink.  Maybe, they were actually camels and my ageing eyes mistook them for horses. 

I digress again.

Back to the topic.  

Now, having some capital is one thing, a question often asked is how much do we need to have exactly before we start investing in the stock market? I have been asked this a few times before.  

A hairstylist asked me if S$10k was enough.  The concept of "enough" is relative like so many things in life.  Very few things in life are absolutes.  However, the question of whether something is "enough" is a very prominent one in life.  

How much to have?

I will use a real life example which happened to someone I know as an illustration.  He had only $5k in savings and went into the market in 2008.  Even with the market running up in the last one year or so, his initial investment is still worth less than $5k today but having used up all of his capital in 2008, he could only watch silently as the market recovered.  Well, he wasn't very silent about it but you get the point.

Then, am I suggesting that if we had only $5k in capital, we should not participate in the market, that we should have more capital before buying shares?  

No. Spare cash that is not needed in the near future or is not part of an emergency fund (e.g. 6 months worth of expenses to be put aside in case of unemployment), should be made to work harder for us.

It is, quite simply, a question of proportion.  Of course, with only $5k, the choices are more limited but the idea is the same as for someone with $50k or $500k.  

Don't plonk all of it down at the same time on one counter or a few for that matter. Always hedge since nothing is ever for sure.  

The question is how much to use for each trade, 10%, 20% or 30%.  

This is up to the individual.  The idea is to reduce risk and taking small steps reduces the probability of a fall.

There is nothing wrong with a $1k value for each transaction and in the process incurring a 3% cost (based on a minimum of $28 brokerage fee per transaction plus other costs) if you were to make more than 10% per annum on that decision.  Nothing wrong at all.  

Rome was not built in a day.  

Wealth building takes time, realistically.  More haste, less speed.

Over time, as our capital grows due to increased savings through employment, capital gains from investments, dividends from investments or some other means, we should not forget this very simple concept.  

"How much to use?" is very often a more pertinent question than "how much to have?".  If you think about it, it applies to other aspects of life as well.

Related post:
Excuse me, are you an investor?