Apollo Investment Management 

More on dollar-cost averaging

In an earlier article, I extolled the merits of dollar-cost averaging, the practice of committing a fixed sum per month for investment. I have been asked to elucidate by showing the specific numbers which would have resulted from a regular commitment. Investors in our new fund will be individuals of high net worth, or financial professionals, who may be more accustomed to committing large lump sums, but the arithmetic works regardless of sophistication; please do not think this is worthwhile only for small savers!

First let's recap with the latest roller-coaster chart:  the fund's net asset value, like the regional stock index, has been highly volatile. It is reasonable to assume that this volatility will continue.
Apollo 001 Fund NAV & MSCI index
Where that chart goes, I cannot resist adding the relative performance, since it looks quite respectable. The fund is not managed against the index, and I could not even tell you the current index weights, but it is as good an indicator as any of the broad market movements which will explain much of the month-to-month fluctuation in the fund's market value.
Apollo 001 Fund relative performance v MSCI Far East all-country ex-Japan index
(My apologies if the charts are over-large, but when I reduce them legibility seems disproportionately compromised. As a webpage beginner, I use Netscape Composer, and my control over the layout leaves much to be desired. If any reader would care to provide pointers for improvement, the suggestions would be most welcome.)

This is a simulation of the portfolio performance which would have been achieved by a dollar-cost averaging investor in the Apollo 001 Fund, investing a fixed amount (say US$10,000 per month), for each of the 21 months since the fund started up on 31 December 1997. The cumulative investment after 21 months would be US$210,000; the net asset value would be US$359,000, representing a gain of 71% over the whole period (not annualised). The figures here are after the 1.8% initial charge which has been a feature of the Apollo 001 Fund and will continue in the Apollo Asia Fund, but before management and incentive fees which will be levied in the new fund.
Chart showing cumulative sum invested and market value of a dollar-averaged portfolio
The portfolio value would have been below the amount invested for six months out of the twenty-one, but by percentages less alarming than those which might have been experienced by a lump-sum investor.

Investors who believe in their timing ability will obviously attempt to invest at or near a market bottom, and if successful in this they will naturally beat the dollar-averager. Many of us however are under no illusions as to our ability in this respect, and if that seems an appalling confession for a money manager, we can point to the example of great investors such as Warren Buffett. The investor might quite reasonably have taken a view that the Asian crisis and recession offered opportunity, that value was available and the risk/reward balance reasonable, at any time from December 1997 (which was when I myself started to invest on any scale) through to the present, but that he could not hope to pick the optimal investment moment more precisely. Because the effect of dollar cost averaging is automatically to buy more shares or units when prices are low than when they are high, the averaging investor would at all times have done better than the expected return of an investor who might have made a lump sum commitment in any of the months from December 97 to that date, but whose choice of month would have been random. This chart shows that the dollar-averager's portfolio has always been greater than the expected value of the lump sum investor's (to the same extent that his average entry cost is lower), and that the advantage has risen over time.
The $-averager's % advantage over the random-timing lump-sum investor
Varying the specific assumptions of starting point and the time period over which the lump sum might be committed will give different results, but the conclusions tend to be similar.

Psychological advantages are perhaps as important as these statistics. "Baby steps" reduce the chance of an enormous mistake. The risk of a large dollar loss is reduced; likewise the risk of missing the market bottom (when many people are more than usually busy with crisis management, and the newsflow is abominably dispiriting). A dollar cost averaging programme cannot guarantee superior performance (if the market goes straight down with no rebound, or for that matter straight up with no pause, it won't help), but the probabilities are in favour. Moreover, the greater the volatility, the greater the benefit. Market volatility is often unsettling for investors, so this is fortuitous.

There are limits, of course. Sometimes it will be be more appropriate to commit assets in a lump sum. But for those investors who have regular cash inflows, concur with us on the intrinsic merits of our portfolio with its mid-teens earnings yield and 7% net dividend yield (value like this is not always available), but are nevertheless nervous about the possibility of short-term valuation losses - dollar cost averaging is one way to go. The Apollo Asia Fund will be happy to accomodate such investors.

Claire Barnes, 4 September 1999

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