This article is written in collaboration with dollarDEX. All views expressed are the independent opinion of DollarsAndSense.sg
Most of us can’t predict when a market crash would happen. We are also hesitant to invest more when stock prices are plunging. This means that in general, most investors, even seasoned ones, are not able to time the market well.
Rather than to time the market, you should be focusing on time spent in the market. Starting young allows you to spend the most time in the market and gives you the opportunity to compound your investment returns over a longer period of time.
One common challenge many young investors face is the lack of capital to begin investing.
However, by using monthly investment plans, young investors can start investing from as little as $100 a month. $100 is a realistic and attainable sum for many young adults, National Service Full-Timers (NSFs) and even students. This allows many aspiring young investors to get started with limited capital.
There are many different platforms Singaporeans can use to start a monthly investment plan. In this article, we look at two key types of monthly investment plans: 1) regular savings plan and 2) value averaging plan.
Regular Savings Plan (RSP)
A Regular Savings Plan (RSP) focuses on dollar-cost averaging, ensuring that you consistently invest the same amount of money into the market at regular intervals, regardless of the unit price.
Here’s a visual to depict how a RSP works:
This means that with the same amount of money, you end up buying more units during months when the price is low and less units during months when the price is high.
In the long-run, you end up paying an average price for your investments across the years. This reduces the risk of market timing and entering at the wrong time.
dollarDEX offers investors a Regular Savings Plan (RSP) where they can regularly contribute a sum of money towards an investment each month. To get started on your RSP with dollarDEX, you just need as little as $100 every month to start investing regularly.
Value Averaging Plan
Similar to a RSP, you can make regular monthly investments with a Value Averaging Plan (VAP). However, unlike a regular savings plan, the amount of money you invest with VAP every month is not fixed.
When you invest using a VAP, you start by setting a monthly target amount that you want your portfolio to grow (i.e. grow by $1,000 a month) and the target annual return (i.e. 8%) . Every month, your monthly contribution will be adjusted to ensure that you are on track to achieve the monthly growth rate you set. This monthly contribution is dependent on the performance of the portfolio in the previous month.
Here’s how a VAP works:
This means that in months when the portfolio is performing well and growing, you invest less. In months when the portfolio has experienced slow growth or is underperforming, you invest more in order to hit the desired growth rate, which will not exceed the maximum investment amount you set as a cap.
When you start your VAP investment journey with dollarDEX, you need to allocate fresh funds into a Money Market Fund first as the VAP works by switching your funds from a Money Market Fund to another fund of your choice to fund your monthly VAP investment. Investors are encouraged to have at least 6 to 12 months of funding to support the VAP. This is unlike a RSP where a pre-determined amount is deducted from your bank account every month.
Which Monthly Investment Strategy Is For You?
Both RSPs and VAPs allow investors to start investing with small sums of money, making them great strategies for young investors who have limited capital, or new investors who do not want to invest a large sum of money at one go, to get started on investing.
A RSP is great for investors that require discipline and want to set a fixed amount to invest every month. There is more regularity in an RSP as the amount you invest does not change, regardless of market conditions. This means that you have certainty over the amount of money that you will be investing each month.
There is more uncertainty with a VAP compared to a RSP but it also comes with flexibility as your contributions are based on the target growth rate you set for your portfolio. The investment amount you invest using a VAP fluctuates, depending on the market conditions. This means that an investor using a VAP would need to accept this flexibility as the investment amounts will differ from month to month. dollarDEX allows you to set the minimum and maximum investment amount based on your comfort level. This ensures that your VAP does not deduct beyond the amount you set.
However, the certainty that an investor would enjoy is that it helps you take advantage of market volatility by automatically investing more when markets are down, and less when markets are up. This takes away some of the psychological reluctance some investors have when markets are down.
dollarDEX offers investors more than 1000 unit trusts to choose from, and it’s easy to start your RSP or VAP using your cash, CPF or SRS funds. You can use their fund finder to search for a fund that suits your investment preferences.
Find out more about the two different monthly investment strategies here.