I did a simple test, using these 2 approaches to STI index investing and want to see which one will fare better when back dated 20 years. At such, the investor would have go through AFC, Sars + Gulf war and the GFC.
To do this test, I make a lot of assumptions, for academic purposes, investors from either 1 approach could well do better or worse if some of the assumptions do not hold true.
1) Investor A and B both start with $5000 and have $1000 fresh funds to invest every year.
Investor A stay fully vested and invest annually. For every year, I use roughly the mid point of the STI for the year to determine his entry point, someone with luck or better TA skills might have an entry point lower than the one I used.
Investor A invest fully when he start in 1995, and thereafter every year, invest $1000 into the STI.
At 2014, he will have STI units worth about 36K, and his total invested capital will be 24K.
A ROA of 50% over 20 years.
Investor B will only enter the market when STI corrects 40% from the last known peak with half of his money, and another half if Market correct 60% from his last known peak. He will liquid half his units and hold cash when returns exceed 100%.
At such, he did not invest his 5k in 1995 but did vested 3.5 k in both 1997 and 1998. He saved his annual 1k and invest 2k in 2002. In 2005, he liquidated half his units and continue to accumulate cash,
In 2009, he became fully vested again 2 tranches of 40% and 60% off the peak of STI.
He has no chance to liquidate his units till now.
So at 2014, his units are worth 38K and still holding 6K cash. Total portfolio is 44K
A ROA of 83% in 20 years.
This is a simplistic test, more for fun than analysis. Just wonder if my temperaments is more suitable to be Investor A or Investor B.
The worst thing that could happen is selling out at a loss in a bear market. Also, if we are holding companies instead of STI index, they could do better(Dividend effects) or worse (belly-up) than STI.