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Lump Sum VS DCA: How Much Would You Have Made (Or Lost) If You Started Investing In January 2020

The STI would have earned you a positive return in 2020 if you invested via a DCA approach each month.


As we enter 2021, some of us will have resolutions that appear similar to what we had in 2020. One of these resolutions could be to start our investment journey in 2021.

This led us to think: for those of us who made this resolution to start investing in January 2020, how would we have fared for the year? After all, 2020 was easily the worst year that the world has experienced in recent history, with millions of lives lost, billions of people affected, and also one of the worst stock markets crash in years.

To help us assess how our investments could have panned out in 2020, we assume that an individual had $10,000 to invest at the start of 2020. The individual could have chosen to 1) invest in one lump sum, which means $10,000 in January 2020, or 2) use a dollar-cost averaging (DCA) method to invest $833.33 each month for 12 consecutive months.

For this article, we simply assume that the investor could have invested in one of two broad-based market indexes – the S&P 500 or the Strait Times Index (STI).

#1 Lump Sum Investment of $10,000 On January 2020 Into The S&P 500

On 2 January 2020, the S&P 500 was at 3,257.85. If you had invested $10,000 on that day, you would have suffered a loss of about 31.3% by 23 March 2020. This means your portfolio would be worth only $6,870 on that day. You would felt incredibly unlucky at that point in time, given that you have lost close to 1/3 of your portfolio value in less than 3 months.

However, if you held on to your investment till 31 December 2020, you would be sitting on profits for 2020. This is because the S&P 500 recovered to close the year at 3,756.07, up about 15.3%. Your $10,000 investment at the start of 2020 would be worth about $11,530 as of 31 December 2020.

#2 Lump Sum Investment of $10,000 On January 2020 Into The Straits Times Index (STI)

On 2 January 2020, the STI was at 3,252. If you invested $10,000 on that day, you would have suffered a loss of about 28.2% by 23 March 2020, when the STI hit 2,333.48. At that point, your portfolio would be worth about $7,180.

If you held on to your investment till 31 December 2020, your initial investment of $10,000 in the STI at the start of the year would be worth about $8,740 as of 31 December 2020. This represents a loss of approximately 12.6% for 2020.

Value On 2 January 2020 Value of 23 March 2020 Value on 31 December 2020
S&P 500 $10,000 $6,870 (-31.3%) $11,530  (+15.3%)
STI $10,000 $7,180 (-28.2%) $8,740 ( – 12.6%)

Note: The calculation above does not take into consideration foreign exchange currency, transaction cost and dividend income

At its lowest on 23 March 2020, the STI didn’t fall as much as the S&P 500. However, while the STI is still showing a loss of about 12.6% as of 31 December 2020, investors for the S&P 500 are sitting on a gain of about 15.3% as of 31 December 2020.

Read Also: How Much Would Singapore Investors Have Made If They Invested $1,000 In Every REIT ETF Since Their Listing?

Would A Dollar-Cost Average (DCA) Approach Be Better?

We were curious about how a DCA strategy would have worked in 2020. After all, the idea behind DCA is that we invest the same amount of money each month so that we buy fewer units when prices are high, and more units when prices are low.

#3 DCA In 2020 For S&P 500

Here’s how the calculation for the S&P 500 turned out if we invested $833.33 each month. Do note that the S&P price level each month we took is based on the index’s closing price on the first trading day for each month.

Month S&P Level Amount Invested Units Bought
Jan 3257.85  $                    833.33 0.2558
Feb 3248.92  $                    833.33 0.2565
Mar 3090.23  $                    833.33 0.2697
Apr 2470.5  $                    833.33 0.3373
May 2830.71  $                    833.33 0.2944
Jun 3055.73  $                    833.33 0.2727
Jul 3115.86  $                    833.33 0.2674
Aug 3294.61  $                    833.33 0.2529
Sep 3526.65  $                    833.33 0.2363
Oct 3380.8  $                    833.33 0.2465
Nov 3310.24  $                    833.33 0.2517
Dec 3662.45  $                    833.33 0.2275
31-Dec 3756.07  $                    10,000 3.1688
Total Value (as of 31 Dec 2020) $11,902

 

From the table above, we can see that an investor who invested $10,000 over 12 months ($833.33 per month) would not only have a portfolio ($11,902) that is worth more than an investor who invested at the start of the year ($11,530) but would also suffer less of a shock on 23 March 2020 when the market was at its lowest point.

#4 DCA In 2020 For Straits Times Index (STI)

The natural assumption that most people have is that investing in the STI in 2020 would have resulted in a loss. After all, the STI is down about for 2020. However, this is based on the assumption that an investor made a lump sum investment in January 2020.

If instead of investing a lump sum at the start of 2020, the intention was to invest an equal sum each month into the STI, how would we have fared in 2020?

Month STI Level Amount Invested Units Bought
Jan 3252  $                    833.33 0.2563
Feb 3116.31  $                    833.33 0.2674
Mar 3007.72  $                    833.33 0.2771
Apr 2440.27  $                    833.33 0.3415
May 2563.69  $                    833.33 0.3251
Jun 2550.86  $                    833.33 0.3267
Jul 2610.17  $                    833.33 0.3193
Aug 2484.91  $                    833.33 0.3354
Sep 2538.55  $                    833.33 0.3283
Oct 2500.74  $                    833.33 0.3332
Nov 2443.13  $                    833.33 0.3411
Dec 2814.12  $                    833.33 0.2961
31-Dec 2843.81  $                    10,000 3.7473
Total Value (as of 31 Dec 2020) $10,657

 

The calculation above is based on the index’s closing price on the first trading day for each month.

This may come as a surprise to some but had an investor committed to a DCA strategy in 2020, his STI portfolio would be worth about $10,657 as of 31 December 2020, or a gain of about 6.6% for the year.

This is pretty impressive since the general sentiment among investors is that the STI is one of the worst-performing markets for the year. However, as you can see, an investor who used a  DCA approach would have made profits in 2020 investing in the STI.

Do note that our calculation does not take into consideration transaction costs and dividend income.

Initial Investment Investment Value On 31 December 2020 Investment Gains In 2020
Lump Sum Investment (S&P) $10,000 $11,530 +15.3%
Lump Sum Investment (STI) $10,000 $8,740 -12.6%
DCA Investment (S&P) $10,000 $11,902 +19.0%
DCA Investment (STI) $10,000 $10,657 +6.6%

Is A Dollar-Cost Averaging (DCA) Strategy Necessarily Better Than A Lump Sum Investment?

Based on the findings of this article, a DCA strategy may appear superior compared to a lump sum investment. However, this is not always the case.

In the event of a bull-run, investors would be better off using a lump-sum investment strategy so that as much capital is being deployed, as quickly as possible. This allows investors to maximise their gains in the market.

However, in a high volatility period such as what we witnessed in 2020, a DCA strategy is preferable since it allows us to pick up more units when prices are low and fewer units when prices are high. At the same time, we also avoid the fear of seeing our portfolio lose a sizeable chunk of its value in a short period.

In fact, as seen in the example of a DCA approach towards investing in the STI, investors could have even made profits in 2020 even though the index was underperforming.

Read Also: Active Investing VS Passive Investing, Lump Sum VS Dollar Cost Averaging: Which Investment Strategy Suits You Best?

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