(1) It reduces the risk of investors of timing
(2) It induces a good saving habit
(3) It allows time for new investors to learn more about a market before committing a larger amount of money
(4) It allows you to follow up with the salesperson or broker that sells you the product or stock.
I will have a numeric illustration
The process of regular investment leads to an effect called pound/cost averaging, which is explained below:
Month Price of Share/Fund ($) Lump Sum ($) Shares Bought Regular investment ($) Shares Bought
| Month | Price of Share/Fund (£) | Lump Sum (£) | Shares Bought | Regular investment (£) | Shares Bought | |
| Jan | 10 | 3600 | 360 | 300 | 30 | |
| Feb | 10.5 | - | - | 300 | 29 | |
| Mar | 9.5 | - | - | 300 | 32 | |
| Apr | 9 | - | - | 300 | 33 | |
| May | 8 | - | - | 300 | 38 | |
| Jun | 8.5 | - | - | 300 | 35 | |
| Jul | 9 | - | - | 300 | 33 | |
| Aug | 11 | - | - | 300 | 27 | |
| Sep | 12 | - | - | 300 | 25 | |
| Oct | 13 | - | - | 300 | 23 | |
| Nov | 11 | - | - | 300 | 27 | |
| Dec | 10 | - | - | 300 | 30 | |
| Total | - | 3600 | - | 3600 | 362 | |
| Average price per share | - | 10 | - | 10 | - | |
| End value | - | 3600 | - | 3622.34 | - |
End value - 3600 - 3622.34 -
As you can see the amount invested ($3,600) and the average price paid per share ($10.00) is the same for both investments. However, as the regular investor was buying shares at differing values throughout the year, the overall effect is that the regular investor has more shares and—even though the share price is the same at the end of the year as at the start—has more money.
Remember also that if you have a lump sum and decide to drip feed your money in through regular investments, the money that isn’t invested each month can still be earning interest in a bank account. Even with interest rates at their current historic lows this will still offer some cushion against market falls.
Many stockbrokers allow you to set up a regular investment scheme. These allow you to drip feed money into your chosen investment and usually have a much lower trading commission than for normal lump sum investments.
Most fund providers also allow you to set up a regular savings scheme to build up holdings in their funds. Many offer this service with a reduced level of required initial investment.
Before investing, it's better to have a sum of money for emergencies. At least 6 mths expenses is the general guideline for most people. Once you have that buffer, then you can start talking about investing your savings.
ReplyDeleteI do not think that regular investment plan is a good idea, unless you are totally not interested in looking at the market yourself and have no interest in FA/TA and just want to concentrate on your career. If that is the case, the only sensible way to invest is into ETF, not any other individual stocks. A individual company can go bust but a good etf that tracks the market will not go bust.
There is a cost of using regular investments. If you incorporate the cost, you'll realize that it's not so fantastic anymore.
Anyway, my point is that regular investments are for those with ill discipline and have absolutely no interest in the stock market, yet wanting a certain portfolio in the equities market.
thanks LP
ReplyDeleteI just think its a good start for some of my friends without much capital . Its cheaper education
ReplyDeleteI don't think there's anything educational about buying regular shares at a fixed timing regardless of market conditions.
ReplyDeleteIt's certainly an exposure in the equities market, but not an education. The best way to learn is to lose your first batch of money. Then you start to be serious and want to learn more. Now that's educational.
I've strong opinions on this :)
For me, I will invest a lumpsum at a better market entry point to maximise my returns.
ReplyDeleteValue Investing Singapore