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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

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 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:

STI ETF monthly prices

With the above information, we derived that

Dollar-cost averaging of STI ETF

MonthCost per unitUnits Purchased Fees
(S$)
Total Monthly Value
(S$)
Sep 20162.90340.9999.59
Oct 20162.91340.9999.93
Nov 20162.90340.9999.59
Dec 20163.03320.9797.93
Jan 20173.08320.9999.54
Feb 20173.14310.9898.32
Mar 20173.18310.9999.57
Apr 20173.25300.9898.48
May 20173.35290.9898.13
Jun 20173.34290.9797.83
Jul 20173.34290.9797.83
Aug 20173.42280.9696.72
Total37311.761,183.46

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$10 + 0.12%)
Cost per unitUnits Purchased Fees
(S$)
Total Cost
3.1737311.421,193.83

Comparing Dollar-cost averaging and Lump-sum investing

 Dollar-cost averagingLump-sum investing
Cost per unit (S$)3.173.17
Units purchased373373
Total Fees (S$)11.7611.42
Total cost of investing (S$)1,183.461,193.83

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.


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.

 

 

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