Benefits of a regular savings plan
"Buy low, sell high". This mantra has been repeated by countless generations of investors over the years. However, a variety of factors come into play which might prevent an investor from fulfilling this intention.
Volatility is part and parcel of the market cycle, but for investors who do not have the time to actively monitor the market, you might get caught out by this. Product factsheets acknowledge this with the famous "past performance is not an indicator of future performance" line. Since no one can really 'time' markets consistently, trying to anticipate price movements is an unreliable approach to investing.
Then, there are emotions. Fear often sees investors miss out on opportunities when markets look bleak. Conversely, greed often results in over-investing during boom times.
A regular savings plan, or RSP, overcomes the hurdles of timing and emotions. Also known as dollar-cost averaging, the approach involves buying a fixed amount of investments every month, no matter how good or bad markets look.
It takes the stress out of investing, as investors do not have to decide if the fund is expensive or not, and if market conditions are right to invest. Each month, the money goes like clockwork into pre-determined investments. Doing so can smooth out price bumps, and result in a lower average unit cost. At DBS/POSB, such plans can be put in place from as little as SGD100* a month.
RSP also offers a way to let you invest at affordable amounts. With investors increasingly buying their first investment at a younger age, many may not have the ability or luxury of investing a large initial lump sum. Another benefit to starting RSPs early: the 'magic' of compounding means investors have more time to grow the nest egg to a sizable amount.
Merits of a regular savings plan:
- Invest without significant capital
- Get complete control over your monthly investment amount, from as little as SGD100 a month
- Learn to avoid pitfalls of timing the market by avoiding the 'right' time to invest
your capital as a lump sum
- Take advantage of the ‘magic’ of compounding
*A minimum initial investment sum of SGD1,000 may be required, depending on the fund.
Total invested: SGD500
Average cost of each unit bought: SGD0.98 (SGD500 / 511.35 units)
Average price of each unit during the same period: SGD1.00
You pay: SGD0.02 less per unit