Working Adults: Should I Invest A Small Sum Regularly Or A Big Sum At One Go

“The best time to plant a tree was 20 years ago. The second best time is now”.

Be it S$100 or a million, it is always good to start early.

TL;DR- 3 key takeaways

• STI ETF: From past year data, lump-sum investors benefit if they invested before February 2017. Other than that, a regular monthly investor wins.
• For beginners: the dollar-cost averaging method such as a Regular Savings Plan can help beat advanced investors.
• For advanced individuals: knowledge can definitely help cut the cost of his investment and gives him an advantage in his investment positions.

What is dollar-cost averaging?

Dollar-cost averaging is an investment technique of investing a fixed amount of money into a particular investment on a regular schedule. When one invests using a Regular Savings Plan, he is adopting such a strategy in his investment.

Pros of dollar-cost averaging

• Requires less time monitoring
• Requires less starting capital to invest (regular savings plan for only S$100 per month)
• Forces you to save regularly
• Buy more shares when the price is low and lesser shares when the price is high.

Cons of dollar-cost averaging

• Dollar-cost averaging requires more transactions, resulting in more fees
• Lump-sum investing has a chance of higher returns

What is lump-sum investing

Lump-sum investing is an investment method of investing a single complete sum of money at one go.

Pros of lump-sum investing

• Chance of outperforming dollar-cost averaging (if you know what you are doing)
• Possibly lower fees when compared to dollar-cost averaging due to lesser transactions

Cons of lump-sum investing

• Requires a lot more effort monitoring the market
• Requires more starting capital to invest

Case Study: Dollar-Cost Averaging vs Lump-Sum Investing

We ran a quick analysis, using historical data of the Straits Times Index (STI) Exchange Traded Fund (ETF) for comparison

Dollar-Cost Averaging On The STI ETF Over A Span Of 1 Year

Assuming:

• You wish to invest S$100 every month
• Your investment in done through a Regular Savings Plan using POSB Invest-Saver (cheapest for investment under S$500)
• Invested on the 15th of each month (POSB Invest-Saver)

Here are the historical share prices of STI ETF on ever 15th of the month, from 15 September 2016 to 15 August 2017:

With the above information, we derived that

Dollar-cost averaging of STI ETF

An investor using the dollar-cost averaging method through his Regular Savings Plan will end up with a total number of 373 units of STI ETF, with a total cost of investment of S$1,183.46. (including fees).

Hence, the average cost is at S$3.17 per unit.

Lump-Sum Investing In The STI ETF

Assuming an investor:

• Invested into 373 units of the STI ETF at S$3.17 per unit.
• Invested using the cheapest brokerage account, DBS Vickers Cash Upfront (Fees: S$10 + 0.12%)

Comparing Dollar-Cost Averaging And Lump-Sum Investing

After comparing, we can see that despite buying the same unit at the same price at a lump sum, the total cost of lump-sum is more despite lower fees. No doubt, the difference in fees will increase over time, and that of a lump-sum investment will be cheaper as time goes by.

Further Reading

Using the same example, a lump-sum investor will have a price advantage if he invests his lump-sum of money before 17 February 2017.

Assuming he managed to invest 373 units of STI ETF at a price of S$3.14 per unit, his total cost of investment will be S$1182.63. This case, his total cost of investing is cheaper than the above example and his price per unit invested is better.