Investing in ETFs using a Regular Savings Plan (RSP)

A Regular Savings Plan or “RSP” is the means for one to execute one’s dollar cost averaging (DCA) strategy.

Regular Savings Plans (RSP) lets you invest a fixed sum, usually from as low as S$100 monthly, and can be invested into your choice of investments (commonly ETFs, Unit Trusts, single stocks etc).

Utilising RSP to help you execute your dollar cost averaging (DCA) strategy helps you accumulate your investment steadily and progressively.

As your investments add up over time, RSP can be seen as one of your basic building blocks in your investment tool kit, providing you with a solid capital base to building a respectable nest-egg for retirement.

Dollar Cost Averaging (DCA) is a conservative investment strategy that provides inherent protection against market volatility and help remove the hassles and risks associated with trying to time the market.

This approach involves investing a fixed amount of funds regularly into the same choice of investments (commonly ETFs, Unit Trusts, single stocks etc) over an extended period, according to a fixed and regular schedule, regardless of market performance and conditions.

This means you buy more units when prices are low and fewer units when prices are high.

In theory, over time, the average cost of your investment could potentially be lower versus a one-time, lump sum investment.

Because of the consistent exposure you get to the market, the idea is that you ride out the ups and downs in the long-term and benefit from the market’s upward trajectory.

The adage, “it’s not about timing the market, but about time in the market”, may resonate with investors who do not have the time or the desire to handle the stress of knowing when to invest and prefer a relatively lower maintenance approach when it comes to investing.

There are 3 key benefits:

1. Smoothening out volatility
   The fear of entering the market at the wrong time can lead to inaction or hasty decisions. Dollar cost averaging has an in-built cost-averaging effect, which helps smooth out fluctuations, as you buy more shares when prices fall and fewer shares when they rise.
   
   
2. Helps you overcome negative investor behaviours or bias
   DCA keeps it simple and saves you from an emotional roller-coaster.

   Regardless of market fluctuations, you invest the same amount of money each month.

   As long as you have the discipline to stick to it, you will be less emotionally affected by market volatility and less prone to making rash investment decisions.

   The routine of dollar-cost averaging also forces you to adopt a passive investment strategy. This removes any emotional connection you have and minimises timing risk.

   Once again, you're less likely to make impulsive, speculative decisions coloured by personal opinions, “noise” on social media or market conditions.
   
   

3. Growing your wealth over the long-term.
   Dollar cost averaging is also a long-term strategy. Barring adverse circumstances, it helps you gradually build up your holdings of a particular investment over an extended period. Over time, the average cost of your investment could potentially be lower versus a one-time, lump sum investment.

1. Beginner or inexperienced investors looking to gain broad based market exposure, or those with lesser time and resources to monitor the market and react accordingly.
   DCA and RSP is ideal for new investors, looking to gain broad based market exposure, especially those who do not really know where to begin. In the context of Singapore, that might be the Straits Times Index (“STI”), which is widely regarded as a benchmark for the Singapore stock market, representing the top 30 largest and most liquid companies on SGX, spread across various sectors.

   It also provides a lower-maintenance approach which can be ideal for the inexperienced investor.
   
   

2. It is ok to start small.
   With dollar-cost averaging, you don't have to start with a sizeable sum.

   With as little as $100 a month, the average Singaporean with little knowledge of investing can take their first small steps on their investment journey.

   DCA is also ideal for young working adults who have just entered the workforce. Over time, as their earning power increases, they may have more spare cash each month to allocate to their investment portfolio in bite-sized portions.

   In the long run, the cumulative value of the investment will grow, boosted by the power of compounding.

   

Exchange Traded Funds or “ETFs” are professionally managed investment funds that typically invests in a diversified basket of stocks or bonds that track the performance of a specific index. For example, the Straits Time Index or “STI”. (The STI tracks the performance of the top 30 companies by market capitalization that are listed on the Singapore Exchange)

Just like stocks, you can trade ETFs on a stock exchange at any point during market hours.

In a nutshell, ETFs offer the best of both worlds, where you have the diversification provided by a fund combined with the tradability of a stock, which can be bought and sold whenever the stock market is open.

We have identified five key features of an ETF.

1. ETFs provide diversification. They help diversify your investments and lower risk
   Investing into an ETF helps you diversify instantly compared to simply buying single stocks.

   Diversification is important for reducing risk whilst maximising returns and ETFs offer investors greater diversity compared to simply buying single stocks.
   
   

2. ETFs are easy to trade, just like a stock.
   ETFs trade on the exchange thereby giving you flexibility to enter and exit at any time.

   Which means you can simply buy and sell an ETF via your broker, at the prevailing market price, at any time if the stock market is open.
   
   

3. ETFs are also transparent. What you see is what you get.
   Generally, ETFs are transparent, as the underlying investments in the ETF are disclosed and freely available to the public.

   This may not always be true in a Unit Trust for example, where the portfolio manager can choose not to reveal all the underlying investments in the fund.
   
   

4. ETFs grant easy and convenient access to a wide variety of markets.
   Investing directly into some markets, usually emerging markets, may not be easily accessible to the general investing public. ETFs however now make it very easy for investors to conveniently access these traditionally difficult to access markets in bite sized chunks.

   A very apt example is Nikko AM’s newest NikkoAM-StraitsTrading MSCI China Electric Vehicles and Future Mobility ETF launched in early 2022, that grants investors direct and simple access to China A-shares.
   
   

5. Bonus – Lower expenses, vs other instruments like Unit Trusts
   Unlike Unit Trusts that may have higher upfront sales fees and higher management fees to compensate for an actively managed portfolio run by a professional fund manager, passive ETFs typically have lower management fees as they passively track an index.

We believe passively managed ETFs are indeed very compatible when employing a DCA strategy. Here are three main reasons why.

1. Passively managed ETFs are funds whose basket of assets essentially mirror the holdings of a designated underlying index, and seeks to replicate as closely as possible, before expenses, the performance of the underlying index. Therefore, using DCA to invest in passively managed ETFs immediately gives you diversified exposure to an entire market, sector or thematic. This reduces the amount of personal due diligence that’s required vs the effort required for researching single stocks.
   
   
2. The indexes that ETFs track are also inherently “self-healing”. Dollar cost averaging into a bad investment is still a bad investment, especially if you invest only into a single stock. Take for example the STI index, which is designed to track the performance of the top 30 companies that are listed on the Singapore Exchange. By investing into an ETF that tracks the STI, you will always only get exposure to the top 30 companies listed on the Singapore Exchange. Any weak companies or “bad eggs” will naturally drop out of the basket of 30 stocks and be replaced by a new stronger company.
   
   
3. As DCA investing is meant for the long term investor, ETFs are generally more economical in the long run vs Unit Trusts as they generally have lower management fees.

Nikko AM currently has the widest range of ETFs listed and available on the Singapore Exchange, with 6 ETFs listed to date.

Our Equity and Fixed Income ETFs includes Singapore Equity and Singapore Bonds (both government bonds as well as corporate bonds) asset classes respectively.

In the REITs space we have Asia’s largest Asia-ex-Japan REIT ETF.

Rounding it off would be our most recent foray into thematic investing, a China focused Electric Vehicles and Future Mobility ETF that offers investors an exciting opportunity to gain diversified exposure to companies along China’s full Electric Vehicles and Future Mobility value chain.

1. Be mindful of transaction costs
   Regular and frequent investments mean more transactions, which might mean more costs eating into your returns. This is especially true for fixed transaction costs, therefore remember to do your due diligence when choosing your RSP provider.
   
   

2. Discipline is key
   When the market is going down, you may feel very tempted to sell.
   That’s why despite the adage “buy low, sell high”, many investors end up doing the opposite — or halting their regular investment. However, that would nullify the strategy’s basic idea of buying more of an investment when the market falls.
   
   Conversely, you may feel exuberant and want to invest more in a rising market. But you may end up paying a higher average price or buying at the top of the market, which is what this strategy is designed to avoid.
   
   

3. Investment Risk
   Like all investments, there are risk factors to be considered when investing in a certain sector or region.
   DCA does not absolve one from the need to conduct the personal due diligence required before making any investment decisions. Dollar cost averaging into a bad investment doesn't make it a good investment.

   Such risks are especially apparent in instances where the securities or sectors involved are in a downward trajectory over the long term, or when it comes to tech heavy “growth” or “disruptive innovation” sectors, or cryto-related sectors that are very volatile in nature.