Strategies for Defensive Investors - Part 2

This entry is to related my previous post.

Table 2: Investment Schedule for Stategies (3) - (8)

Table 3 shows the amount of money the investor put into the market every year under different strategies. The figures in red is the amount of money taken out from the market.

Figure 2: Return on Investment

In Figure 2, "Total Investment" show the cost of the equity portion of each portfolio at the end of 2008 and 2007. When total investment is negative (red), it means total sale proceeds (money taken out from the market) has exceeded the total cost of the equities in the portfolio (money put into the market), ie. the investor has net realized profits.

Using IRR method, we can see that (3) and (4) has the lowest internal rate of return in both 2007 and 2008. On the other hand, (6) has the highest IRR in both years.

[Useful tips:
Formula for calulating IRR in Excel: "=IRR(Values)"

"Values" is the range of cells that contain the numbers for which you want to calculate the internal rate of returns. Eg. =IRR(A1:A10) will give you the IRR for the values in cell Al, A2, A3... A10.
Do note that in order to calculate IRR, there must be at least 1 negative number and 1 positive number.]

I am not sure if this makes sense, this is how I interprete: Although DCA [dollar cost averaging ie. (3) and (4)] is a good strategy to increase wealth, the efficiency of the invested capital under this strategy is quite low. The large portfolio size (see Table 1 and Figure 1 in my previous post) is the result of high yearly investment amounts rather than high return on per dollar invested.

Now, suppose our investor is actually the fund manager of unit trusts that employ these strategies. This will be how the historical fund prices look like.

Table 3: Historical Performance of the Various Unit Trusts

Risk of the unit trusts is measured by standard deviations. Very clearly, (6) offers the least volatility. Hence it may be the best strategy for risk-adverse investors, protecting them from hefty decrease in their investment during market meltdown.

My conclusion is: practise DCA if you wish to increase your wealth. Do not sell the investment regardless of market condition. Contrary to what many believe, market timing, or rather, attempts to "buy low sell high", may not necessarily enhance your wealth. However, it may be useful to more risk-averse investors who cannot withstand the stress of seeing the value of their wealth dwindle during bear market.