"Life finds a way." - Dr Ian Malcolm (Jeff Goldblum) - Jurassic Park
"Life finds a Way". It always does.
Despite the risk of exposure, loss of lives and unprecedented challenges like lockdowns, quarantine, job losses, pay cuts and working from home, we are slowly but surely finding a way out of the Covid-19 pandemic.
2020 was no doubt a challenging year, but it was also the year we learnt to adapt and innovate many aspects of our lives. We now see things in a new light, and our priorities have changed substantially. Perhaps the new normal is here to stay!
One of the critical lessons we learnt in 2020 is the importance of financial stability and building a strong financial foundation for our future. We can achieve financial security and independence through diligent savings and prudent investing.
Lump sum or Systematic Investment Plan(SIP) are the two ways you can invest for securing your future and achieving your financial goals.
But is one better than the other?
With the market valuations so high, which is the best way to invest money in 2021?
Benefits a Systematic Investment Plan(SIP)
Easy to start and continue
- You can start a regular savings plan with a $500 monthly investment. You can continue to invest for 1, 2, 3, 5 10 or 15 years depending on your goal and affordability.
- Markets valuations are constantly changing, moving up or down, making it difficult to time the entry. With a monthly SIP, you can get multiple entry points into the market, helping you reduce your average unit price and take advantage of the dollar cost averaging.
- There are many SIP options in UAE, with automatic payments via your bank account or credit card helping you automate savings and build a regular savings habit.
- A monthly savings of $500 can help you accumulate $36,893 at 8.00% pa returns over 5 years.
- You can accumulate $100,000 by investing $1281 or AED 4714 in only five years at 10.00% pa growth.
- It only takes $2395 invested for 15 years at 10.00% growth to accumulate One Million Dollars.
- Indecision is the mother of procrastination.
- Waiting for the right time to invest is like waiting for the waves to cease to take a dip in the sea.
- SIP investment eliminates the need to time the market making, it easy to start an investment irrespective of the market cycle stage.
What if the markets keep going up?
- We are amidst an extended bull run since 2010. Investing in SIP during bull a market can increase the average purchase price, limiting the investment's upside.
- Also the impact of the power of compounding is subdued when investing for short to medium term financial goals via SIP. However SIP investment is very ideal for long term financial goals.
Benefits of Lumpsum Investment
Deploy savings and beat inflation
With interest rates at all-time lows, bank deposits are no longer able to keep up with inflation. Lumpsum investing helps you deploy your idle capital into investments in line with your financial goals and risk tolerance, without largely compromising on the liquidity.
Lump-sum investments can help you participate in the prevailing bull market and grow wealth relatively quicker, making it easy to achieve medium term financial goals.
Economy of Scale
Lump-sum investing provides access to some of the best investment options at lower fees, thus increasing the net returns every year.
Robust Investment Portfolio
It enables you to build a robust investment portfolio with better diversification and efficient risk management.
You can generate regular and dependable passive income by investing lump-sum capital into income yielding bonds/bond funds/equity funds, structured products or pension plans.
But, what if the markets go down?
Yes, markets can go up or down and so will the value of your investments that is why it is crucial to follow prudent investment strategies like;
- Goal-based investing
- Appropriate assessment of Risk Tolerance
- Right Asset Allocation in line with goals and risk tolerance
- Review and Rebalancing of your Portfolio
Lump sum or SIP, which is a better way to invest money in 2021?
- Leading investment banks like Morgan Stanely have predicted a strong global GDP growth of 6.1% in 2021 led by Emerging Markets, the US and then Europe.
- Governments worldwide are pushing hard on the vaccination drive, to curb the further spreading of the virus and slowly eradicate it through various measures.
- The technology disruption is creating new growth avenues for businesses, making them more efficient and scalable
- Governments worldwide are likely to continue the economic stimulus throughout 2021 with an aim to boost the economy.
- Thanks to easy access of a wide range of investment platforms globally, there has been a huge influx of investors and this trend is likely to improve as market returns keep improving.
As discussed above, both SIP and lump-sum investments have their benefits and limitations. Choosing between must depend on your financial objective; i.e.,
- Whether you are looking to build capital
- Looking to grow wealth by investing your savings
- Or looking to do both
SIP or a regular savings plan is pocket-friendly and easy to start and continue; A lumpsum investment during a bull market can generate higher returns.
However, a lump sum investment requires significant knowledge and market analysis before investing your hard-earned savings.
So if you are a beginner to investing in Mutual funds, it is better to start with a SIP/Regular Savings Plan. If you are someone with idle lump sum savings, you may consider investing a part of it to benefit from the prevailing bull market.
However the best strategy would be combining both. If you have $35,000 or more as investable surplus you can start with an initial lump sum and keep adding additional funds every month, or ad hoc at your convenience giving you the best of the both worlds.
As an Independent Financial Advisor, I can help you set up an efficient SIP or Lump-sum investment plan, in line with your goals and risk tolerance.
I can also help you Rebalance your portfolio at regular intervals to ensure that it stays aligned with your financial plan.
Arrange a Free Consultation today and jumpstart your journey towards wealth creation.