{"id":2601,"date":"2020-11-19T08:00:36","date_gmt":"2020-11-19T00:00:36","guid":{"rendered":"https:\/\/www.pzl.sg\/blog\/?p=2601"},"modified":"2024-11-01T14:14:20","modified_gmt":"2024-11-01T06:14:20","slug":"dollar-cost-averaging-singapore-does-it-really-work","status":"publish","type":"post","link":"https:\/\/www.pzl.sg\/blog\/dollar-cost-averaging-singapore-does-it-really-work\/","title":{"rendered":"Dollar Cost Averaging Singapore: Does it really work?"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">By and large, dollar cost averaging places great emphasis on using a disciplined approach towards investing. In detail, we will invest our budget regardless of the portfolio&#8217;s price on each time period. In time to come, we will accumulate enough investment units that may turn into a profit. With this in mind, let&#8217;s understand the concept and find out whether this strategy works that well.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Table of Contents:<\/h3>\n\n\n\n<ol id=\"block-12239b5e-3c73-44a2-bf49-63796181afa6\" class=\"wp-block-list\">\n<li><a href=\"#part1\">Guiding Principles for Dollar Cost Averaging<\/a><\/li>\n\n\n\n<li><a href=\"#part2\">Understanding the Concept<\/a><\/li>\n\n\n\n<li><a href=\"#part3\">When the Price moves Downwards<\/a><\/li>\n\n\n\n<li><a href=\"#part4\">When the Price moves Upwards<\/a><\/li>\n\n\n\n<li><a href=\"#part5\">When the Price moves Down, then Upwards<\/a><\/li>\n\n\n\n<li><a href=\"#part6\">When the Price moves Up, then Downwards<\/a><\/li>\n\n\n\n<li><a href=\"#part7\">What is Dollar Cost Averaging good for?<\/a><\/li>\n\n\n\n<li><a href=\"#part8\">Real Life Application<\/a><\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\">One Minute Summary:<\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Overall, dollar cost averaging ignores the price fluctuation and market trend in investment.<\/li>\n\n\n\n<li>Instead, it focuses on investing the same budget on every pre-defined time period.<\/li>\n\n\n\n<li>Above all, dollar cost averaging works only if the portfolio&#8217;s price recovers eventually.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"part1\">Part 1: Guiding Principles for Dollar Cost Averaging<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Altogether, there are three guiding principles:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>Firstly, there is a <strong>defined period<\/strong> on which the investment is made, e.g. 10 periods;<\/li>\n\n\n\n<li>Next, we will <strong>invest the same capital<\/strong> during each time period, e.g. $1,000 per period;<\/li>\n\n\n\n<li>Finally, we will <strong>invest on each time period<\/strong>, i.e. no period is skipped or missed.<\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\">For that reason, we will invest the same amount of capital on every time period. Emphatically, we will ignore any price fluctuation in the portfolio throughout our investment period.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"part2\">Part 2: Understanding the Concept<\/h2>\n\n\n\n<h3 class=\"wp-block-heading\">Part 2.1: Basic Assumptions<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">As as start, let\u2019s understand how dollar cost averaging works as an investment strategy. To illustrate, we will use the following assumptions:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>Number of Periods: 3 years<\/li>\n\n\n\n<li>Capital for each Period: $10,000<\/li>\n\n\n\n<li>We will invest the same capital ($10,000) for each period (year 1 to year 3).<\/li>\n\n\n\n<li>All figures are rounded off to the nearest 2 decimal places.<\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\">To begin with our investment journey, let\u2019s invest our budget of $10,000 into a portfolio. Seeing that current market price at $10 per investment unit, we will own 1,000 investment units today.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"1200\" height=\"628\" src=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_concept1.webp\" alt=\"Dollar Cost Averaging: Understanding the Concept\" class=\"wp-image-13183\" srcset=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_concept1.webp 1200w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_concept1-450x236.webp 450w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_concept1-620x324.webp 620w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_concept1-150x79.webp 150w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_concept1-768x402.webp 768w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><figcaption class=\"wp-element-caption\">Dollar Cost Averaging: Understanding the Concept<\/figcaption><\/figure>\n\n\n\n<h3 class=\"wp-block-heading\">Part 2.2: When the Price moves Upwards<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">During the second year, the portfolio&#8217;s price increased to $12. In view of our budget of $10,000, we will purchase an additional $10,000 \/ $12 = 833.33 investment units.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In contrast, we bought lesser investment units than year 1. This is owing to the higher price per investment unit now.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 2.3: When the Price moves Downwards<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">In the third year, the portfolio&#8217;s price fell to $11. As a result, our budget allows us to buy $10,000 \/ $11 = 909.09 investment units.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">By comparison to the second year, we are able to purchase more investment units. This is given that lower price per investment unit.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In summary, we stick to the same budget and purchase the maximum investment units each time.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>When the price is high, we will buy lesser investment units.<\/li>\n\n\n\n<li>On the other hand when the price is low, we can afford to buy more investment units.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Now that you have a grasp on dollar cost averaging, let\u2019s go through four examples together.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"part3\">Part 3: When the Price moves Downwards<\/h2>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"1200\" height=\"628\" src=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_down1.webp\" alt=\"Dollar Cost Averaging: When the Price moves Downwards\" class=\"wp-image-13182\" srcset=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_down1.webp 1200w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_down1-450x236.webp 450w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_down1-620x324.webp 620w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_down1-150x79.webp 150w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_down1-768x402.webp 768w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><figcaption class=\"wp-element-caption\">Dollar Cost Averaging: When the Price moves Downwards<\/figcaption><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">To illustrate, let&#8217;s start with an annual budget of $10,000. On this occasion, we will purchase $10,000 \/ $10 = 1,000 investment units.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 3.1: At Year 2, Price per Investment Unit = $8<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Since the price of an investment unit is cheaper, we are able to buy more units. Consequently, we will purchase another $10,000 \/ $8 = 2,250 investment units.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In essence, we will use our budget and repeat this process every year.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 3.2: Five years later&#8230;<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Eventually, we invested a total capital of $50,000 with 11,416.67 investment units. At the present time, these investment units are worth 11,416.67 x $2 = $22,833.33. In other words, we lost $50,000 &#8211; $22,833.33 = $27,166.67.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 3.3: Long-Term Outlook<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">In the long run, dollar cost averaging allows us&nbsp;to purchase more investment units in the downtrend market. However, this strategy ignores the portfolio&#8217;s fundamentals and market movement. Under those circumstances, we may empty our life savings into a bottomless pit. Hence, dollar cost averaging does not work this time.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"part4\">Part 4: When the Price moves Upwards<\/h2>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"1200\" height=\"628\" src=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_up1.webp\" alt=\"Dollar Cost Averaging: When the Price moves Upwards\" class=\"wp-image-13181\" srcset=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_up1.webp 1200w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_up1-450x236.webp 450w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_up1-620x324.webp 620w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_up1-150x79.webp 150w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_up1-768x402.webp 768w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><figcaption class=\"wp-element-caption\">Dollar Cost Averaging: When the Price moves Upwards<\/figcaption><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">Comparatively, let&#8217;s look at an example when the portfolio portrays an upward trend. In the same way, we invest a capital of $10,000 each year. In this case, we will purchase $10,000 \/ $2 = 5,000 investment units.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 4.1: At Year 2, Price per Investment Unit = $4<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Given that higher price, we will buy $10,000 \/ $4 = 2,500 investment units only.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Summing up, we will use up our budget to repeat this process every year.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 4.2: Five Years later&#8230;<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Be that as it may, we ended the fifth year with 11,416.67 investment units. At this point, these investment units are worth 11,416.67 x $10 = $114,166.67.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">To sum up, our total profit is $114,166.67 &#8211; $50,000 = $64,166.67.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 4.3: Long-Term Outlook<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Given that higher volume of investment units at the start, our profit increases as the market continues to rise. As a matter of fact, this should be an obvious phenomenon during a bull run.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"part5\">Part 5: When the Price moves Down, then Upwards<\/h2>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"1200\" height=\"628\" src=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_downup1.webp\" alt=\"Dollar Cost Averaging: When the Price moves Down, then Upwards\" class=\"wp-image-13180\" srcset=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_downup1.webp 1200w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_downup1-450x236.webp 450w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_downup1-620x324.webp 620w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_downup1-150x79.webp 150w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_downup1-768x402.webp 768w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><figcaption class=\"wp-element-caption\">Dollar Cost Averaging: When the Price moves Down, then Upwards<\/figcaption><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">After two simple rounds of investing, let\u2019s combine the scenarios from Part 3 and Part 4 together. Correspondingly, we will use the same budget of $10,000 per year. On this occasion, we can purchase $10,000 \/ $10 = 1,000 investment units.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Thereafter, we will repeat the process from Part 3 or Part 4. In short, we will ignore the unit price and exhaust our budget ever year.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 5.1: Five Years later&#8230;<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">In time to come, we have 6,166.67 investment units in the fifth year. At this time, they are worth 6,166.67 x $10 = $61,666.67.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Summing up, this gives us a profit of $61,666.67 &#8211; $50,000 = $11,666.67.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 5.2: Long-Term Outlook<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Owing to the initial downtrend, we managed to buy more investment units. After the portfolio&#8217;s recovery, these investment units are worth a higher value. Despite staying at the same unit price (as year 1), dollar cost averaging helps us to reap a 23% profit!<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"part6\">Part 6: When the Price moves Up, then Downwards<\/h2>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"1200\" height=\"628\" src=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_updown1.webp\" alt=\"Dollar Cost Averaging: When the Price moves Up, then Downwards\" class=\"wp-image-13179\" srcset=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_updown1.webp 1200w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_updown1-450x236.webp 450w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_updown1-620x324.webp 620w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_updown1-150x79.webp 150w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_updown1-768x402.webp 768w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><figcaption class=\"wp-element-caption\">Dollar Cost Averaging: When the Price moves Up, then Downwards<\/figcaption><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">In contrast, let&#8217;s invert the scenario in part 5. In like fashion, we will keep our annual budget of $10,000. Accordingly, we will purchase $10,000 \/ $6 = 1,666.67 investment units.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Thereafter, we will repeat the process from Part 3 or Part 4. In the same way, we will ignore the unit price and exhaust our budget ever year.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 6.1: Five Years later&#8230;<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">At length, we have 6,833.33 investment units in the fifth year. Presently, these investment units are worth 6,833.33 x $6 = $41,000.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In sum, we lost $50,000 &#8211; $41,000 = $9,000.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Part 6.2: Long-Term Outlook<\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">Unlike the situation in Part 5, we lost 18% of our capital. For one thing, this proves that dollar cost averaging works only if the portfolio recovers in time. Otherwise, there is a high chance of losing more money in the future.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"part7\">Part 7: What is Dollar Cost Averaging good for?<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">In the final analysis, dollar cost averaging creates simplicity in investing by ignoring the market trend. Since this is not a foolproof strategy, you may consider it when you<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>Have a <strong>limited investing capital<\/strong>;<\/li>\n\n\n\n<li>Prefer <strong>not to invest all of your capital<\/strong> at one go;<\/li>\n\n\n\n<li>Are <strong>unsure of the market direction<\/strong>.<\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\">Above all, every investment comes with some form of&nbsp;<a href=\"https:\/\/www.pzl.sg\/blog\/types-of-investment-risk-that-you-should-know\/\">investment risks<\/a>. With this in mind, you should invest based on your risk appetite after a thorough research. At the end of the day, you won\u2019t want to lose your life savings.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"part8\">Part 8: Real Life Application<\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Before I end, here is a real life application for dollar cost averaging. For this purpose, I took the data from an investment-linked policy fund.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"1200\" height=\"628\" src=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_reallifeapp1.webp\" alt=\"Dollar Cost Averaging Singapore: Real Life Application - An Investment-Linked Policy Fund\" class=\"wp-image-13178\" srcset=\"https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_reallifeapp1.webp 1200w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_reallifeapp1-450x236.webp 450w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_reallifeapp1-620x324.webp 620w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_reallifeapp1-150x79.webp 150w, https:\/\/www.pzl.sg\/blog\/wp-content\/uploads\/2024\/11\/blog_dca_reallifeapp1-768x402.webp 768w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><figcaption class=\"wp-element-caption\">Dollar Cost Averaging Singapore: Real Life Application &#8211; An Investment-Linked Policy Fund<\/figcaption><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>First Published: 27 November 2019<br>Last Updated: 19 November 2020<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Dollar cost averaging reduces the price risk associated with an investment portfolio. However, it is not foolproof. Find out the truth now.<\/p>\n","protected":false},"author":1,"featured_media":13184,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[75,88],"tags":[],"class_list":["post-2601","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment","category-popular"],"_links":{"self":[{"href":"https:\/\/www.pzl.sg\/blog\/wp-json\/wp\/v2\/posts\/2601","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.pzl.sg\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.pzl.sg\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.pzl.sg\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.pzl.sg\/blog\/wp-json\/wp\/v2\/comments?post=2601"}],"version-history":[{"count":0,"href":"https:\/\/www.pzl.sg\/blog\/wp-json\/wp\/v2\/posts\/2601\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.pzl.sg\/blog\/wp-json\/wp\/v2\/media\/13184"}],"wp:attachment":[{"href":"https:\/\/www.pzl.sg\/blog\/wp-json\/wp\/v2\/media?parent=2601"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.pzl.sg\/blog\/wp-json\/wp\/v2\/categories?post=2601"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.pzl.sg\/blog\/wp-json\/wp\/v2\/tags?post=2601"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}