[Investing] Applied Dollar-Cost Averaging

In the previous post, I simulated the principle of dollar-cost averaging. Today I shall apply it onto real market data.

The data of interest is the Nikko AM STI ETF (G3B) that is traded in the Straits Times Index (STI). An ETF that tracks a broad-diversification index like the STI is similar to an index fund. Personally, I have invested in G3B via a regular savings plan, so this is also a little exercise for myself.

I have obtained 5-years' worth of monthly closing prices from Yahoo Finance for this exercise, and I will be investing $100 per month in the G3B. The effects of transaction fees are assumed to be negligible.


Price Vs Average Price

The average price is calculated by dividing the total amount invested by the units accumulated. The result is presented in the chart below.

As expected, the average price is smoothed and almost consistent. Consistent price = consistent cost. You may see that even with the very high price between Periods 50 and 60, the average price is still maintained.


Amount Invested Vs Holding Value

The following chart tracks the changes in holding value (the worth of the units that are bought and held) against the total amount invested.

You might have noticed that the portfolio started when the price is peaking, thus the Holdings Value exceeded the Amount Invested starting at about Period 15 because of the increasing prices, until at about Period 30, when prices began to dip.

Between Periods 30 and period 45 (this is slight more than a year, by the way), prices were suppressed, overall holding value declined too, but it was a good time for consolidating more units. As you can see, after everything recovers, the increase in holdings value is much greater, because of the consolidation period.

This is why we need to stay invested.


What if you started late?

It is never too late to start. I have also prepared similar charts for a 2-year investment period.

The trough period helps to consolidate units while the prices are suppressed.

From the charts, we see that thanks to the trough period, the holdings value exceeded the total amount invested quickly. Should an investor started 1 year later, at the midst of bullish price, he might not get that kind of performance. Instead, he might want to reduce (NOT stop) his contribution since the buying power has reduced, and increase only when prices are low again.

See, dollar-cost averaging works if one stays invested for a long, long time.

Feel free to comment!


~ZF