Comparison of the 4 Strategies used by Long-Term Investors to Buy Shares

Long term investors deploy various strategies to make their share purchases.  Some buy with a plan in mind, some just buy when they have cash at hand, as short term price volatility doesn't affect their decision.  We shall look at 4 such strategies that investors commonly deploy (and no, I am not recommending market timing here), and compare them side by side based on SPDR S&P 500 ETF (SPY) for the past 5 years, to dive deeper into their respective performance.  Kindly note that to make this comparison, some assumptions have been made based on my personal understanding of the individual strategies.  If there are any wrong assumptions being made, kindly comment and let me know, so that I can learn from my mistakes as well!

1)    Dollar-Cost Averaging (DCA)

DCA is an investment strategy pursued by an investor who has access to regular cash-flow that can be deployed to purchase shares at regular intervals (eg, weekly, monthly or quarterly) regardless of the shares' price.  The amount of cash deployed regularly is fixed.

In the comparison below, SGD 500.00 is deployed around the start of every month, based on the price listed.

2)    Value Averaging (VA)

VA is an investing strategy that works like DC, in terms of making monthly purchases of shares, but differs in its approach to the amount of each contribution.  In VA, the investor sets a target amount of their portfolio each month, and then adjusts the next month's contribution according to the relative gain or shortfall made on the original portfolio.

In the comparison below, the value of portfolio is targeted to grow at 1% monthly, with a further capital injection of SGD 500.00 (Long term S&P 500 returns is 10.5%, hence I rounded up to simplify calculations at 1% per month).  After the first month, if portfolio value rises to SGD 600.00, the next purchase will only be using SGD 410.00 capital to cap the portfolio value at SGD 1,010.00 on second month.  On the contrary, if portfolio value falls to SGD 400.00, the next purchase will be using SGD 610.00 capital to prop up portfolio value back to SGD 1,010.00.  If the value of portfolio keeps on increasing beyond the targeted value, the monthly purchase will cease.  Investment capital will be accumulated to wait till the next opportunity when portfolio value falls below target value again.

3)    Buying in Tranches (BIT)

BIT is an investment strategy suitable for an investor with a lump sum of money at the sideline, with a downward trending market at the same time.  It involves the investor planning to make purchases using variable percentages of the capital available when the price of shares fall by varying percentages from its recent high.

In the comparison below, we will accumulate SGD 500.00 monthly to grow the capital.  When opportunity arises, 30% of the accumulated capital will be deployed to buy into shares when it's price fall by 10% from recent high price, allocating another 40% of accumulated capital when prices fall by 20% from recent high price, and the final 30% of accumulated capital when prices fall by 30% from recent high price.  If the price falls by 12% from its recent high and rebounds, only 30% of the accumulated capital will be deployed, and the remaining 70% of capital will continue to accumulated monthly till the next opportunity arises.

4)    Lump-Sum Investing based on Moving Average (LIMA)

LIMA is an investment strategy suitable for an investor with a lump sum of money at the sideline, with a downward trending market at the same time.  It allows the investor to regularly save up the investment capital, and make the desired lump-sum purchase when the share price drops below the moving average (MA) chosen.  Investor can choose to use 20 MA, 50 MA or 120 MA, depending on individual's investment horizon.  After the purchase, the cycle repeats and investor continues to save until the next time share price fall below MA again.

In the comparison below, we will accumulate SGD 500.00 monthly to grow the capital.  The MA 50 on the weekly chart is chosen for this comparison.  Monthly purchases will be made for as long as the share price stays below the MA, and pause when share price stays above the MA.

Illustration of the 4 Strategies:

Over the 5-year period, lowest ETF price recorded is $238.68, highest ETF price recorded is $476.30, giving a median price of approximately $357.49.  All 4 strategies end up with average holding price below this median value.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

My Personal Analysis of the 4 Strategies from the Illustration done above

DCA Pros:

a)    Easiest to follow and remain discipline among the 4 strategies.  When the time comes, just buy with the allocated capital, regardless of the price.  Avoid the need to time the market which may result in poorly timed purchase, hence minimizes any emotional roller coaster ride. 

b)     In addition, as there are no periods where purchase of shares are not allowed as in the case of the other strategies, maximum amount of capital can be deployed, thus the highest amount of absolute profits (in dollars) can be achieved after 5 years.

DCA Cons:   

a)     As it involves buying more shares when prices are low and buying less shares when prices are high, the average share price will be on the higher side (for long term rising trend) compared to the other strategies, hence lowering the profits in percentage terms.

VA Pros:    

a)     Similar to DCA, when the time comes, just buy with the allocated capital. 

b)     As no shares are bought when the share price rises to the point where portfolio value is higher than the target value, hence, the average share price of portfolio is low and the percentage profits achieved is high.

VA Cons:   

a)     Calculation of the capital allocation based on value of the portfolio is required monthly, which makes it a hassle. 

b)     When the share price keeps on rising beyond the target portfolio value, there is opportunity cost for not being able to purchase shares, resulting in the smallest portfolio size at the end of 5 years, with the lowest absolute profits (in dollars) achieved.

BIT Pros: 

a)    Shares are only bought when prices fall by fixed percentages from recent highs, hence the long term average holding price of shares is the lowest after 5 years.  As such the percentage profits achieved is the highest among the 4 strategies.

BIT Cons: 

a)    Constant monitoring of the market to identify the buy signals according to plan is required, and that may affect the emotions of individuals, especially during periods of wild price swings. 

b)    Moreover, if the plan only caters for a maximum 30% decline of the share price from recent highs, one may run out of cash to further buy the dip, missing out opportunity to buy quality shares at lower prices if there is an unexpected 40% or even 50% decline from highs (not impossible as seen in Meta Platform share price recently).

LIMA Pros: 

a)    Shares are only bought when prices fall below the chosen MA, ensuring that the average holding price of shares will be below the long-term average price of the shares. 

b)    Investment will be rather passive as it eliminates the need for investor to constantly monitoring the market.

LIMA Cons: 

a)    Based on the illustrated case, it's surprising that this strategy will result in the highest average holding price for the shares after 5 years ( for long term rising trend), hence giving the lowest percentage profits.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

To set the record straight, there are a couple of factors we need to consider before we conclude which strategy is the "best".  Firstly, this entire illustration is done based on the latest 5-year duration of SPY's share price.  If the time-line is lengthened to 8 years or even 10 years, will it still give the same conclusion?  Moreover, this illustration is based on SPY.  If we change it to a different share like Tesla (TSLA), Apple (AAPL) or even Development Bank of Singapore (DBS), it may have generated different results based on how their share prices move differently from one another.

All in all, I believe there is no best strategy for buying shares, there is only the most suitable strategy for individuals to practice to buy shares.  Personally, I would like to continue my investing journey via a relatively stress-free and passive strategy.  Therefore, DCA is definitely my top choice.  However, I think a hybrid of strategies may not be a bad idea as well.  DCA during the normal market movements, and deploying BIT during market corrections and crashes may help to improve returns.  What about you?  Any preferred strategies besides these 4?  Feel free to share your ideas, or correct me if I have made any mistakes in my understanding on these strategies.  For now, Barista FIRE, here I come...!