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 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 Straits Times Index (STI) Exchange Traded Fund (ETF) for comparison
Dollar-cost averaging on the STI ETF over a span of 1 year
- 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 every 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
|Month||Cost per unit||Units Purchased||Fees|
|Total Monthly Value
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$10 + 0.12%)
|Cost per unit||Units Purchased||Fees|
Comparing Dollar-cost averaging and Lump-sum investing
|Dollar-cost averaging||Lump-sum investing|
|Cost per unit (S$)||3.17||3.17|
|Total Fees (S$)||11.76||11.42|
|Total cost of investing (S$)||1,183.46||1,193.83|
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.
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.