Choosing Either Monthly Or Lump-Sum Investment

In my previous post, I shared how lump-sum and monthly recurring investments can produce different returns. In this post, I will explore further but this time I will flip the chart (as shown below) to simulate a market downtrend scenario.

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Negative Investment Returns

As expected, the returns will be in negative territory. But do notice below how the return from the monthly investment, although in a loss, tend to be slightly better compared to lump-sum investment.

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Unit Price Source: Public Mutual Online (PMO), Analytics tab
**PeISMF Initial Unit Price is calculated by adding of 0.0125 distribution sen to its current unit value of 0.3105

Comparing the return during a market uptrend (please refer to the previous post) and market downtrend, we can conclude the below:

1. Lump-Sum investment generates higher returns during a market uptrend.
2. Monthly investment limits capital loss during a market downtrend.

Choosing A Strategy

Say tomorrow you plan to invest in a financial asset. You have done your study and realized the asset is undervalued. Since it is cheaper, it makes sense to invest a lump-sum into the asset and hold it till the asset value grows. Or it could be the asset is overvalued. In this case, you will rather wait for the asset price to drop before investing a lump-sum into it.

But what if you do not know if it is undervalued or overvalued? Chances are you won’t even know how the market will perform in the short and long run. (Who really knows?) It is best to adopt the monthly investment strategy in this scenario as you tend to take a lesser risk by giving up potential good returns in exchange for reducing the risk of loss.

You may treat it as a strategy to protect yourself against ignorance. End of the day, no one strategy is superior to another. As mentioned previously, both strategies have their benefits and downside. Over the long term though, both strategies should generate a decent return.