A little goes a long way, with time.
Start early. The earlier you begin; the more time you will have to enjoy the benefit of compounding effect.
Take advantage of the compounding effect and you could grow your wealth in the long-term with small but regular contributions.
Your yearly gain increases every year even though you did not top up your investment amount. This increase in yearly gain is due to the compounding effect. In the long run, the effect of compounding, or reinvesting your returns, can be very significant.
Illustration of the benefits of compounding effect
| |
Value |
Yearly gain |
| Today |
S$ 1,000 |
- |
| In 1 year |
S$ 1,060 |
S$ 60 |
| In 2 years |
S$1,123.60 |
S$ 63.60 |
| In 3 years |
S$1,191.02 |
S$ 67.42 |
Assuming a rate of return of 6% annually.
If you invest S$1,000 today, you will have S$1,060 in one year, assuming a rate of return of 6% per annum. Rather than withdraw the S$60 gained, you reinvest it for another year. Assuming the same rate of return at 6%, your investment amount of S$1,060, will grow to S$1,123.60 by the end of the second year.
It's all about time in the market, not timing the market
Many investors believe that they can "time the market" – getting in before the prices rise, and getting out just before the prices fall.
Anticipating these market rises and falls can be extremely difficult and stressful for the investor, which is why RIS may be a preferred approach as compared to taking the risk to "time the market".
Illustration of the benefits of dollar cost averaging
| Month |
Dollar Cost Averaging |
One Lump Sum |
| Amount |
Unit Price |
No. of units |
Amount |
Unit Price |
No. of units |
| January |
S$ 1,000 |
S$ 50 |
20 |
S$ 5,000 |
S$ 50 |
100 |
| February |
S$ 1,000 |
S$ 10 |
100 |
|
|
|
| March |
S$ 1,000 |
S$ 100 |
10 |
|
|
|
| April |
S$ 1,000 |
S$ 75 |
13 |
|
|
|
| May |
S$ 1,000 |
S$ 20 |
50 |
|
|
|
| Total Amount Invested |
S$ 5,000 |
S$ 5,000 |
| Total Units Purchased |
193 |
100 |
| Average Price Paid Per Unit |
S$ 26 |
S$ 50 |
| If market price falls to S$ 20 in June |
Loss of S$ 1,140 |
Loss of S$ 3,000 |
| If market price rises to S$ 60 in June |
Gain of S$ 6,580 |
Gain of S$ 100 |
If the unit price falls to S$20 in June, you will have realised a smaller loss if you had practised dollar cost averaging, than if you invested one lump sum in January.
On the other hand, if the unit price rises to S$60 in June, you will have received a much larger gain with dollar cost averaging than with a lump-sum investment.
Based on the above scenario, with dollar-cost averaging, your losses are minimised while your gains are potentially enhanced.
