Why it makes sense to time the market for certain ETFs

 There are two popular adages in investing:

"Time in the market is better than timing the market"

and a related one:

"If you have a sum of money to invest now, investing a lump sum is better than dollar-cost averaging (DCA)"

In many articles you will find online, the second statement is usually backed by studies showing that lump sum outperforms DCA roughly two-thirds of the time, even by the well-reputed investment firm Vanguard. 

However, I am here to make a contrary statement - I have found that for certain ETFs, it actually makes more sense to time the market, and NOT DCA or lump sum!

Gasp! How can it be true?? Heresy! Lies! Yes, go ahead, quote me.

"It makes sense to time the market (Teo, 2021)"

I want to point out that 'time in the market is better than timing the market' is premised on a very important assumption - that markets go up over time. Hence, it makes sense to get your investment in early and get it to work, rather than trying to wait for the perfect opportunity to enter where you may miss the market upsurge.

However, there are markets which do not meet that criteria of going up over time. Some markets actually trade in a range. Here's an example of the SPDR Straits Times Index ETF (ES3) which trades on SGX:

You don't need to use any fancy indicators to see that the price generally ranges between roughly 2.5 and 3.5 (with some exceptions, but I'm trying to draw a best fit support/resistance line). Hence, my hypothesis is that it does NOT make sense to quickly put in your money into the market, but you NEED to time it so that you don't get in at a bad price.

I did some backtesting with market data from 2017 to 2020, comparing 3 different strategies:

Strategy 1 - Lump sum $12,000 at the start of each year. 

Strategy 2 - DCA $1,000 each month

Strategy 3 - "Timed DCA" : DCA $1,000 each month ONLY IF market price is below 60% of the price range that ES3 trades between (i.e. I'm using $3.132). If market price is above that price, to accumulate that amount till a month where market price falls below my threshold price. 

(e.g. In Jan if market is above that price, save that $1,000 to next month. If in Feb the market is below that price, then put in $2,000)

For all 3 strategies, I account for dividend payouts too.

Here are the results:

It's not even close - timed DCA blows the other two strategies out of the water, even after accounting for dividends that were foregone due to the delayed investment.

Interestingly, DCA also beats Lump Sum here - likely because ES3 does not go up over time at all and trades in a range, so getting your money in earlier does nothing; even after accounting for higher dividend payouts. Some other markets that also trade in a range that this should apply to are: EEM, VWO, VXUS.

It's worth noting that with this timed DCA strategy, you could be 'sitting out' of the market for a long time. For the 2017-2020 period, you would sit out for up to 19 months (Apr 17 - Oct 18), when ES3 is doing really well. In spite of this, my backtesting above shows that it is still profitable to just sit out and hold cash, rather than enter at a suboptimal price (i.e. the dividends gained from being in the market during that period does not surpass the amount you lose in mistiming your entry)

To sum up, before you dive into an investment, look at the price action history of the underlying before following any touted strategies. One major caveat is of course that past performance is no guarantee of future performance (who knows, maybe after today ES3 goes on a long-term upward trend), though in the stock market historical patterns often repeat themselves.

This is not financial advice not a recommendation to buy ES3 or any of the stocks mentioned. I have no positions in any of the stocks mentioned, though I intend to be long ES3 - when the price is right :)