Saturday, October 18, 2014

Always fully vested vs Market Timing (War Chest) approach

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:
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:
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.


  1. A few observations, if I may comment:

    (1) One must have the guts to stick to the rule and invest after STI has dropped 40 per cent from the peak. Some people might be scared to catch a falling knife;

    (2) Things often look good in hindsight. We are assuming history is an indicator of future performance. We never know how STI might react in the future. It might retreat up to a maximum of 39.9 per cent before it soar again.

    Your article gave me some food for thought though. Thanks!

    1. Totally agree, the 40 - 60 is arbitrary. Only 2 crisises out of 3 give 60% fall.

      There can only 20 - 40 - 60 in 3 shots combination,

      And more frequently do 10- 20 - 30 - 40 - 50 5 shots combinations.

      For me, my thoughts for myself is after the core port is build up, allow the interest dividend to be compounded, fresh funds jnjection should not be trigger happy. I know anything less than 10% will buy trigger fresh jnjection from me, at least j have not add any counters although I have about 2 counters fallen more than 10% than my purchase price.

      Better to hold cash to allow a few sniper shots for emerencies.

      When we have more rounds, we can hit a little more freely...

  2. A sliding window analysis with different start date may give a better sense. Missed those analysis that Teh Hooi Ling used to publish.

    Incidentally, a ROA of 80%+ over 20 years seem worse off than CPF-SA?

    1. CPF interest are reinvested and compounded, in the anaylsis above; the 3% dividend is ignored and but compounded.

      As for sliding window analysis, that is beyond me. I however did play with several scenarios like looking at returns at various point of time. In the end, if we need to exit at a unfavourable point, that is going to set people back by quite a lot.

  3. The most important thing that you missed out is the about 3% dividend yield for staying vested. At the end of the day, both ways would generate u decent returns, the indivdual would fare best in the investing style most comfortable to himself, so as to reduce or have no mistakes (such as selling out into a bear market) cheers felix leonf

    1. Hi Felix,

      I am aware of the 3% dividend effect that A will have over B over 2 years initially and the 4 years after 2005. So the gap should be slightly smaller but hardly will make any difference to the results.

      But if we are talking about companies and/ or Reits with yield of above 5%, then the difference will become more glaring.

      I did this not as a academic exercise but to convince myself both will give decent results.

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