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Idea Of The Week: A Look Into The RSP Method Of Investing! [3 Feb 17]
FSM Weekly

Idea Of The Week: A Look Into The RSP Method Of Investing! [3 Feb 17]

In this week’s “Idea Of The Week”, we take a look at the RSP investing strategy and look at how the investing method can be used to an investor's advantage to garner better returns!

Over the years, the Singapore government has aggressively advocated the importance of financial planning for citizens, particularly for retirement planning purposes. Furthermore, with inflation creeping up on us over prolonged periods of time, things will inevitably become more expensive. It is no wonder people are increasingly seeing the value in investing and at an earlier age too. In this Idea Of The Week segment, we take a look at a commonly talked-about investing strategy, the Regular Savings Plan (RSP) and look into how the investing method can be used to an investors advantage to garner better returns!

What is A Regular Savings Plan (RSP)?

The Regular Savings Plan (RSP) is a method of investing whereby a fixed amount of monies is used every month for investment purposes. The RSP utilises the Dollar Cost Averaging (DCA) method of investing and typically adopts a disciplined approach to investing where an investor stays invested throughout a period of time, regardless of market conditions, by making fixed regular investment contributions. This way, the RSP method of investing also prevents the investor from attempting to time markets. When the prices of fund units are low, the RSP method of investing results in a greater purchase of the number of units, and when the prices of fund units are high, the RSP method results in a smaller purchase of fund units. At Fundsupermart, an investor interested in utilising the said method of investing may simply, upon selecting the funds he would like to invest in, select the RSP payment method and indicate his preferred debit method—DDA stands for Direct Debit Authorization (it is a deduction from your bank account), and/or CPF OA/SA/SRS—as well as enter his desired RSP amount for monthly purchase. The minimum monthly RSP investment amount typically starts at a pocket-friendly SGD 100 for most funds.

Does The RSP Method Of Investing Work?

The RSP method of investing works best for investors with shorter investment horizons and in periods of turbulence where markets experience several up and downswings, only to end up being at a similar level to where it was initially. Also, as highlighted in an earlier article, What Should You Do If You Invested At The “Top”?, the RSP method of investing has historically helped reduce investors’ losses in periods of severe market distress and asset bubbles (such as that seen in the Great Depression, World War II, Tech bubble and Global Financial Crisis, to name a few) with  significantly smaller maximum drawdowns and much quicker recovery of losses!

A recent example in which the RSP has worked well can be seen using the US market in 2016 as a case study. The year has been eventful for the said market with the drop in global equities at the beginning of the year, Brexit in the middle of the year, and the presidential elections towards the end of the year, with several spouts of scepticism over the pace of economic momentum (particularly before the fourth quarter). Although, the S&P 500 had posed a generally strong upward trend through 2016, there were also notable downward dips in the interim! The investor who has entered the US market at the beginning of 2016 using the RSP method with a $1,000 RSP investment amount would have garnered a price return of 17.36% from his investment as of end December 2016, a significant outperformance of the S&P 500 Index which gained 9.54% over the same time period as the RSP method allowed one to buy the dips in the year!

Chart 1: Since Beginning 2016, Investors In The US Market Would Have Garnered Significantly Greater Returns Through RSP

There have also been cases where markets were notably volatile even over an extended period and the RSP method of investing has shown itself to garner much better returns than would a traditional lump-sum method of investing! One example is an investor with an investment (through RSP) in the Japanese equity market from May 1949 till January 2013 (an investment horizon close to 64 years) with a $1,000 RSP investment amount. The investor would have garnered a total return of 840.3% in JPY terms!

The benefits of the RSP method of investing is no doubt present in periods of heightened volatility and in periods of market distress and this could sometimes result in good gains even over longer periods. Also, the benefits of the RSP method of investing include simplicity, convenience and reduced stress of deciding whether a fund prices are expensive or cheap and whether market conditions are suitable for investing or not. Thus, the RSP method of investing could also be a good starting point for investors who have just started out on their investment journey and who may easily fear in market downswings and may have a tendency to be swayed by market sentiments. It is worth noting, however, that while the RSP method may sometimes result in good gains even over longer periods, investors with longer investment horizons (thus allowing them to ride out any interim market volatilities) as well as a larger initial sum for investment, could typically see better returns by using the traditional lump-sum method of investing given the high likelihood of stock markets to trend upwards over extended periods of time. The RSP method of investing remains one out of the many investment strategies ever invented and we believe it is important to appreciate the pros and cons of the different strategies possible and be flexible to adjust to one which best suits the needs of the investor and the period in which the investor is investing.

RSP Is Good But Do Not Invest Blindly!

While the RSP investing strategy does keep an investor invested regardless of market conditions, it remains that investors should select the markets with which to RSP into based on market valuations, and not blindly into any given market! In order to maximise gains, the well-known “Buy Low, Sell High” saying continues to govern as a basic rule of investing! Given the historically proven phenomenon that markets tend to be mean reverting over time, markets with PE ratios markedly higher than their fair PE ratios (expensive markets) could typically be less suitable as investment options given their potential valuation contraction, rather than valuation expansion, over time. Their potential decline in valuations over time would definitely reduce the total returns investors may gain from investing in the said markets. As mentioned in a recent article, FSM MAPS: Estimated Potential Upside and Yields, at this juncture, markets with relatively low forecasted returns in the near term in view of higher valuation multiples include the US and Europe markets. Meanwhile, markets such as Asia ex Japan and many Northern Asian markets pose comparatively good room for valuation expansion given their currently low valuations compared to their respective fair valuations. In addition, the Asia ex Japan and many Northern Asian markets also pose potentially strong earnings growth as well as acceptable dividend yields which translate to good total returns in the near term for the investor putting his monies into the said markets at this juncture. Should you have any queries regarding undervalued markets in our current investment climate as well as the RSP method of investing, do not fret! Our friendly investment advisors stand readily available to assist in those areas!

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