2022 has been a bad year for the financial markets. An attack on Ukraine by Russia started the Ukraine-Russia war, leading to high global inflation and high interest rates. These factors then led to poorer earnings for companies and a gloomy outlook for future earnings, causing prices to decline.
As of 23 December 2022, the S&P 500, which tracks the 500 biggest companies listed on the stock exchanges in the United States, is down by about 20% for the year. In Singapore, the Straits Times Index (STI) has shown resilience with the index currently at 3,257 (23 December 2022), up from 3,134 at the start of the year (3 January 2022).
An investor who starts investing in the S&P 500 at the start of the year will be looking at a portfolio loss of about 20% while an investor in the STI will make a small gain.
But as with all investments, how and when you invest is just as important as what you invest in. We take a look at how our investments would have performed if we had taken a dollar-cost averaging (DCA) approach towards investing instead of a lump sum investment at the start of the year.
For this review, we assume an investor wants to start investing in January 2022 and has $10,000.
He has to either 1) Invest one lump sum, which means $10,000 in January 2022, or 2) use a dollar-cost averaging (DCA) method to invest $833.33 each month for 12 consecutive months.
Scenario 1: Lump Sum Investment Of $10,000 On January 2022 In The S&P 500
In scenario 1, we invested $10,000 in the S&P 500 on 3 January 2022, the first trading day of 2022. In our hypothetical scenario, we take the closing price on 3 January 2022 – 4,796 – as the cost price of our investment. In total, we bought 2.09 units in the S&P 500.
As of 23 December 2022, our 2.09 units are worth $8,034, a loss of about 19.7%.
|Date||S&P 500||Units||Portfolio Value|
|3 January 2022||4,796||2.09||$10,000|
|23 December 2022||3,844||2.09||$8,034|
Scenario 2: DCA Of $10,000 In 2022 In The S&P 500
For a DCA strategy, we take the closing price of the first trading day for the month. For example, 3 January, 7 February, 1 March, etc. Each month, we invest $833.33.
|Date||S&P 500||Units||Portfolio Value|
Using a DCA strategy, we would have taken advantage of the lower prices in the following months to accumulate more units, thus increasing the overall amount of shares we buy.
As of 23 December 2022, our portfolio would be worth $9,283, a loss of about 7.17%. If the S&P 500 recovers to 4,140, we would break even on our investments.
Scenario 3: Lump Sum Investment Of $10,000 On January 2022 In The STI
A $10,000 investment on the STI on 3 January (3,134) would have purchased 3.191 units of STI shares. As of 23 December 2022, the price is at 3,257 which means that the portfolio is worth $10,392, a gain of 3.92%
Scenario 4: DCA Of $10,000 In 2022 In The S&P 500
While the STI is currently trading at a level similar to what it was at the start of the year, prices have been fluctuating throughout the year, reaching a 52-week high of 3,445 on 5 April 2022, and a 52-week low of 2,969 on 21 October 2022.
Similar to Scenario 2, we take the STI closing price on the first trading day of the month. For example, 3 January, 7 February, 1 March, etc. Each month, we invest $833.33.
Similar to investing a lump sum at the start of the year, we would still be making a small gain of $126 (up by 1.26%) though this is marginally lower than investing a lump sum (up 3.92%). The reason for this is that while prices are currently trading at a level that is similar to what it was at the start of the year, the STI was mostly up for the most part of the year, before a decline in September to November, followed by a year-end decline.
Source: STI, SGX
There are two simple conclusions we can draw.
The first is that during a bear market when prices are volatile, it’s likely a safer, more conservative strategy, to take a DCA approach. A DCA approach allows us to average out the prices of our investments so that we don’t end up investing at a high, only for the price to then fall below our investment level. Market timing is less of a risk using DCA.
However, if prices are not declining, then a DCA strategy doesn’t help. This is because if we don’t get enough opportunity to invest when prices are declining, then we don’t get the chance to accumulate more units when prices are low – as seen by the STI price chart in 2022.
Ultimately, of course, nobody can truly predict the future and we won’t know when prices are going to go up or will decline. Hence, if you want to protect yourself against the risk of a bear market, then a DCA approach toward investing in the right assets could be a long-term strategy worth considering.
However, if you are confident that the market will perform well, or has already bottomed out, then a lump sum approach would make sense.
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