The Benefits of Regular Saving Plans

I have always been a great fan of regular saving plans. I started one for my son within a few weeks of his birth and will soon be opening one for my daughter who was born a few days ago. Saving for things that we want later in life is a great habit to develop at an early age but I think that a regular saving plan is something that most people would benefit from.

One of the beauties of buying mutual fund units via a regular saving plan is that it takes a lot of emotion away from investing. We all know that the two emotions that are the enemy of every investor are fear and greed. When markets are going up week after week, it is hard to stop oneself from being sucked into the excitement and investing at the top. Similarly, when there is nothing but despair in the news and shares are cheap and unloved, it is very hard to summon the courage to invest. When we look at it, the great times to invest are the periods of crisis. We may tell ourselves that next time the markets are at bargain basement prices, we will invest. However, when such times arrive, we find a reason not to invest.

A few weeks ago I wrote an article suggesting that it might be a good time to invest in India given the massive share price falls. With hindsight, it looks like it was a good time to invest but I suspect that few have done so as the news flow was so grim at the time.

If you were investing in a regular saving plan, you would be buying some very cheap units during the summer. In fact, you would have bought lots of cheap units after every major crisis. For every $100 that you invest every month, you will be buying a lot more units when they are cheap than when they are expensive. Whilst this may seem a basic statement of mathematics, it is the principle behind a really important investment technique known as dollar-cost-averaging. Quite simply, if you regularly invest into a fund that at some point in the future rises, you will reap handsome rewards having accumulated so many cheap fund units during times when prices were depressed. If you choose to invest into an insurance savings scheme, you may also have the benefit of some valuable insurance protection alongside your investment.

So what sort of person would benefit from dollar-cost-averaging? I would say almost everyone. If you are an expat hoping to save a nest-egg to take home with you, a regular saving plan is a really convenient way of doing that. Of course, if you have a particular financial goal in mind such as a wedding, school fees or a top-up to your retirement fund, then a regular saving plan can be the perfect solution. Even If you are a serious investor who enjoys trading in individual equities, currencies, bonds or commodities, a regular saving plan into a fund can provide a good bedrock to build your portfolio upon.

The choice of funds to invest into in a regular saving plan is clearly driven by your own personal circumstances, attitude to risk and the length of time before you will need to redeem the investment. I, personally, will be investing in relatively high risk investments for my children as they have a very long time horizon and the inevitable setbacks will give us the chance to buy lots of cheap units. That is why I am investing into a mixture of funds specialising in areas such as emerging markets, India and GCC.