Do you often save to ‘invest to indulge’? It’s when we save up regularly to reward ourselves on a new pair of shoes, or anything on our wishlist. If you’ve been doing this, then you’re basically Dollar Cost Averaging (DCA). The intention behind DCA is to minimize the impact of volatility by investing the same amount of money in the same investment (e.g. mutual fund) at regular intervals, say monthly. DCA is a simple investing strategy worth considering for anyone with cash they have been hesitant to invest.

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In this article, we’ll share with you how investors can benefit from doing DCA to generate long-term returns. As a start, let’s delve deeper into the JCI's historical performance to understand what opportunity you’d miss if you don’t start DCA.

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The Jakarta Composite Index (JCI) has been a reliable indicator of Indonesia's stock market performance for several years. Over the past 17 years, the JCI has delivered an average annual return of 10.8%. However, the index's recent performance has been relatively stagnant, with returns remaining flat over the past 5-10 years.

With average returns from the JCI diminishing over the years, we think investors deserve a higher rate of return considering the amount of risk and volatility they are exposed to in the equity markets.

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We think one way around this is to adopt a DCA strategy. By investing a fixed amount of money at regular intervals, regardless of the market conditions, DCA can potentially help investors benefit from the market's volatility. This approach mitigates the impact of market fluctuations on the overall investment portfolio, enabling investors to achieve better long-term returns. Adopting DCA helps with making irrational investment decisions (think FOMO investing), so you can stay focused towards your goals. 

In the following sections, we explore the key advantages of DCA and provide practical tips on how to implement this strategy effectively.

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5 Year Example

If we take a simple example of investing in the JCI (at historical prices) by investing Rp. 1,000,000 every 3 months starting from the first investment in December 2017 and until December 2022, we get the following: 

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  1. We would be investing 21 times throughout 5 years with a total of Rp. 21,000,000 throughout 5 years. 

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  1. Our Average Cost by the end of December 2022 would be at an Index equivalent of 6,062 of the JCI.

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  1. That would get us a total return of 13.2% over the period and 4.9% return per year (on a time-adjusted basis). This gets a value of Rp. 23,731,273 (vs. Rp. 21,000,000 invested). 

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  1. Lastly, we would earn higher returns of 1.4% per year than just buying and holding for 5 years which only gives a 3.5%.

Final Thoughts

Despite the fact that a 5% annual return may not be sufficient for long-term investors, this article highlights how dollar-cost averaging can be a beneficial investment strategy. Staying invested in the market is crucial, and DCA helps to reduce any volatility and protect an investor's returns. This is just one way to increase returns, but there are other methods to enhance portfolio returns (read our article: Understanding How to Build A Good Investment Portfolio), such as diversifying with funds, or allocating different amounts during market corrections, such as the COVID-19 crisis.

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In light of the current macroeconomic condition and concerns over high inflation and a possible recession, it's important to note that while there may be short-term volatility in the equity market, in the long-term, it can generate sufficient returns. Since June 2005, the JCI has generated a 11% return per year through a simple buy and hold strategy. Therefore having a long term mindset, staying disciplined in investing, managing your cash flows well, and having knowledge of the tools to build better portfolios and returns is crucial.

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At Simpan, we strive to provide the best investment experience by building investment portfolios based on people's risk profile and investment objectives and keeping them informed along the way of their investment journey.

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