Simple and smart: the huge benefits of a monthly investment plan

Maurice Gravier is Chief Investment Officer, Wealth Management at Emirates NBD, responsible for providing Emirates NBD’s private banking and retail clientele with comprehensive financial advisory and valuable guidance on investment strategies. Gravier has over 20 years of investment experience, running large pools of assets for sophisticated international investors, across asset and wealth management. He held senior positions in Natixis Asset Management in France, Lombard Odier in Switzerland, Majid al Futtaim Trust in Dubai, before joining Emirates NBD in 2018. Gravier is a French national with a Masters in Management from ESCP Europe in Paris.

Website: https://www.emiratesnbd.com/en/

A monthly fixed investment plan is certainly not rocket science, but it is definitely worth considering

  

At this time of the year, we usually write about our Global Investment Outlook. To give you a preview, we start 2021 with a reasonably constructive stance and more allocation to emerging markets than ever. However, this is not today’s topic. Looking back at 2020, market volatility has been absolutely extraordinary: global stocks typically lost more than 30% in March, before gaining an astonishing 70% to end the year. If anything, this illustrates the difficulty, and the perils, of trying to time the market on a short time horizon.

This is why today, we will for a minute forget the (recovering) economy, the (elevated) asset valuations and the (bullish) investors’ sentiment and focus on the merits of the simplest of all systematic processes in the wealth management world: investing a fixed amount of money every month. We see three excellent reasons to consider doing this, especially at a young age.

The first one is obvious: discipline. Saving money is not easy, especially when running on a tight budget or when faced by an ocean of temptations. Allocating a fixed portion of one’s monthly income to savings at the end of each month is wise, and it quickly becomes painless, especially if it is done automatically. You simply adjust to a slightly reduced net disposable income for your expenses.

The second reason is much more powerful from an investment point of view: investing a fixed dirham amount every month mitigates the risk of your investment, making it particularly suitable for volatile assets (assuming, of course, your time horizon is long enough). The mechanism is simple: buying the same amount of an asset regardless of its price means that you buy more of it when the price is low, and less when the price is high. This is a dirham-cost averaging strategy, which makes considerable sense in a volatile world.

Let’s illustrate with numbers. Last year, had you invested 1000 AED at the end of each month from December 2019 on a global equity index (MSCI World), your portfolio would be worth AED 14,515 at the end of December 2020. By comparison, a lump sum of AED 12,000 invested at once at the end of 2019 would be worth AED 13,908. The extra return obviously comes from the fact that you would have averaged part of your cost at the end of March. One may argue that 2020 was very particular, which is true: the configuration of a crash followed by a recovery is obviously favorable to systematic investing. However, replicating the same exercise over the last three years is also interesting. Starting at the end of 2017, with 36 periods, a monthly investment of AED 1000 in global stocks would become a portfolio worth AED 46,129 at the end of 2020. A lump sum of AED 36,000 invested over the same period would have become AED 48,630. In this case, the lump sum is better, but not by a wide margin. Is the AED 2,500 gain worth locking up a large sum of capital, compared to the convenience of budgeting a more modest amount every month?

The third key advantage is not just financial; it is about peace of mind. By investing 1000 AED every month this year in global equities, the value of your portfolio would never have been down month on month, while the lump sum would have seen a -30% drop at the end of March. Over 3 years, the same applies: the lump sum investor would have seen his portfolio dropping by more than -20% from its peak value at the worst time, compared to less than -15% for the monthly saver. The latter would at least have the satisfaction of “buying the dip” in the following months, while the former would have just had the frustrating feeling that he had lost time and money. Peace of mind is not just about happiness, it has impacts decision taking. The pressure of a huge value drop in a portfolio is considerable and leads many investors, including the most seasoned professionals, to cut their losses, often at the worst possible time. This is what happened to many in 2020, and the same who panic-sold in March had to panic-buy in November.

Let’s go further with an extreme illustration, which is using Bitcoins instead of global equities. Over three years, the cryptocurrency has doubled, but at some point in time its price was -75% lower than at the end of 2017. So, while overall performance has been great, it has certainly not a quiet ride for lump sum investors. By comparison, for the same total amount invested, a “systematic monthly investor” would have seen his capital quadrupling, and the worst drop of his portfolio would have been around -30%.

A monthly fixed investment plan is certainly not rocket science, but it is definitely worth considering, whatever your preferred asset allocation strategy, especially in an era of volatility, for the discipline, the risk-mitigation, and the peace of mind. We will elaborate on our 2021 strategy in details in our next column. Stay safe.

Any opinions expressed in this article are the author’s own

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