After the stock market volatility in 2020, investors have much to smile about in 2021. The recovering economies breathed optimism into the markets after the pandemic ravages in 2020. If we have made a new year’s resolution to start investing this year, we may be wondering how and what should we invest in. What would our investments be like if we started in 2021 (as per our last year’s resolution?
Let us assume that a new investor starting out in 2021 had $10,000 to invest at the start of the year. This investor could have chosen to 1) invest in one lump sum, which means $10,000 in January 2021, or 2) use a dollar-cost averaging (DCA) method to invest $833.33 each month for 12 consecutive months.
Looking back, you can check our article on Lump Sum VS DCA: How Much Would You Have Made (Or Lost) If You Started Investing In January 2020. Dollar-cost averaging (DCA) gave investors a gain of 6.6% compared to a loss of 12.6% if they had invested a lump-sum in the STI in 2020. DCA also returned better returns of 19% compared to 15.3% for lump-sum investment into the S&P500 in 2020.
However, 2020 was marked by its market volatility with a significant market crash. 2021 was much less volatile, buoyed by market optimism bolstered by the recovering economies.
For this article, let’s find out how much this investor would have gained (or lost) if he or she invested in one of the two broad-based market indexes – the S&P 500 for the Straits Times Index in 2021.
#1 Dollar Cost Average Into The S&P500
The S&P500 is one of the best-known broad-based market indexes. It is a free-float market capitalisation weighted index that tracks the performance of 500 large companies listed on the stock exchanges in the US. As there is no limit as to the proportion of a single stock, it is possible for a few companies to dominate the index.
If we have invested $833,33 each month into the S&P500, we would have gained a return of $1,377 or 13.77%.
|Month||S&P Level||Amount Invested||Units Bought|
|Total as of 31 Dec||4,766.18||$10,000||2.3870|
|Total Value (as of 31 Dec 2020)||$11,377|
Note: Prices taken are based on the closing price of the first trading day of the month
#2 Lump Sum Investment Into The S&P500
If we had invested $10,000 in a lump-sum at the start of 2021, we would have ridden the full wave of the bull market in 2021.
The S&P500 started the year at 3,700.65 and ended the year at a high of 4,766.18. If we had invested $10,000 on the first trading day of 2021, we would be looking at a portfolio worth $$12,879.17 or a return of 29% by the end of 2021.
This may be unsurprising to some investors as the index has enjoyed a clear uptrend in 2021. The top 5 stocks that form the S&P500 (as of 31 December 2021) – Apple, Microsoft, Amazon, Alphabet (Google) and Tesla – have continued their strong performance on the back of increasing digitalisation and recovering economies even as borders reopened (and shut) again.
#3 Dollar Cost Average Into The STI
On the local front, we can also invest into the Straits Times Index which is a market capitalisation weighted index that tracks the performance of the top 30 companies listed on SGX. A look at the top companies of the STI would show a big difference in the composition of the index compared to the S&P500. DBS, Singtel, UOB, OCBC and Mapletree Commercial Trust form the top 5 companies of the STI, showing the dominance of financials and REITs (real estate investment trusts) on the index.
If we have invested $833,33 each month into the STI, we would have gained a return of $137 or 1.37%.
|Month||STI Level||Amount Invested||Units Bought|
|Total as of 31 Dec||3123.68||$10,000||3.2451|
|Total Value (as of 31 Dec 2020)||$10,137|
Note: Prices taken are based on the closing price of the first trading day of the month.
This low return may be surprising considering that DCA-ing into the STI in 2020 gained 6.6%. However, DCA as an investing strategy tends to perform better in times of market volatility which happened in 2020. Additionally, the STI remained relatively flat in 2021 after March. This gave few opportunities for DCA to execute its strategic value of buying more units when there is a dip and averaging out the cost of acquiring more units.
#4 Lump Sum Investment Into The STI
If we had invested $10,000 in a lump-sum at the start of 2021, we performed better than DCA.
The STI started the year at 2858.9 and ended the year at 3123.68. If we had invested $10,000 on the first trading day of 2021, we would be looking at a portfolio worth $$1,0926.01 or a return of 9% by the end of 2021.
The S&P500 Outperformed The STI in 2021
Despite lump-sum investing being a better investing strategy for 2021, the STI’s performance still lagged behind that of the S&P500. While the STI has redeemed itself from being one of the worst-performing markets of the year, S&P500 clearly surpassed the STI by leaps and bounds.
This is due to the difference in the performance of the underlying stocks. S&P500 has a high weightage of technology stocks (29%) while STI is heavyweight on financials and REITs. The technology sector has continued to outperform in 2021 while the real estate sector is still recovering from the hit of the pandemic.
Other factors also contribute to the better performance of the S&P500. You can read the thoughts of Loo Cheng Chuan, founder of 1M65 Movement, on his preference for the S&P500 – COVID-19 Stock Market Crash: Why I Always Prefer The S&P 500 Over The Straits Times Index.
|Initial Investment||Investment Value On 31 December 2020||Investment Gains In 2020|
|DCA Investment (S&P)||$10,000||$11,377||13.77%|
|Lump Sum Investment (S&P)||$10,000||$12,879||28.79%|
|DCA Investment (STI)||$10,000||$10,137||1.37%|
|Lump Sum Investment (STI)||$10,000||$1,0926||9.26%|
Note: calculations do not account for transaction costs and dividend income.
Read Also: Complete Guide To ETF investing in Singapore
Is Lump Sum Investing Necessarily Better Than A Dollar-Cost Averaging (DCA)?
The one benefit of dollar-cost averaging (DCA) is that we do not need to have a large amount of capital to start. For instance, if we did not have $10,000 at the start of the year, we would still be able to invest monthly by putting aside a portion of our monthly salary for investing. As illustrated in 2020’s analysis, DCA can perform better when there is significant market volatility and we may suffer smaller losses during a market downturn if we are implementing a DCA strategy.
In a clearly upward trending bull market, a lump-sum investing strategy would perform better. However, as no one has a crystal ball to predict how the market would perform in the future, there is no assurance that investing a lump-sum in the market today would guarantee good results at the end of the year.
Regardless of our investing strategy, we would need to look beyond the results of a single year’s performance. Both lump-sum and dollar-cost averaging (DCA) will help build up our investment portfolios for the long term. How we chose between the two strategies would depend on our available capital and our investing preferences.
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