The myths in regular saving plan

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Most investors have heard about the benefits of regular saving plans. The main benefit of a regular saving plan (RSP) is the opportunity to buy more units of the unit trusts when the market goes down. Regular saving plans are particularly useful for volatile markets because it is in volatile markets which there are possibility of the market going down. The second benefit of regular saving plan is it provides a discipline way for investors to accumulate his wealth. However, there are 3 myths about regular saving plan.

First, the benefits of regular saving plan are not entirely true all the time. The benefits of regular saving plan diminish as the portfolio increases in size. Let’s say you have accumulated $1,000,000 in investments through regular saving plan of $10,000 per month. Let’s say the market goes down by 50%, your invested assets would suffer $500,000 in lost. It does not matter what you do with your $10,000 per month investments because your accumulated investment is going to take a very long time to breakeven. This is because the total portfolio size is significantly larger than the RSP amount.

Second, it is a myth that once a RSP is setup, there is no need to monitor. The reason is due to the first reason I just mentioned in that once the portfolio size is large, it becomes increasingly important to manage the portfolio such as rebalancing and performing tactical asset allocation.

Third, many financial advisers assume the RSP will provide positive customer satisfaction. Far from truth, RSP almost always provide negative customer satisfaction if the adviser is not competent in explaining how investment works. Why is this so? Consider an investor who RSP in an uptrend market. The absolute return at the end of period will always be worst off compared to the underlying market. If the investor RSP in a downtrend market, the portfolio will always be negative although it is slightly less negative. This means the investor will always either see a small positive return or a small negative return. If the potential upside is always so small, the investor is not likely to be satisfied as the fees involved may appear to be unjustified. Actually, looking at the absolute return is the wrong way of reporting the returns. Financial advisers should report the return of the portfolio based on time weighted average return instead.

Therefore, my advice to those who thinks regular saving plan is the solution to good investment performance is going to be disappointed. That is why, it is important to engage a competent professional investment adviser.