Four myths about regular savings plans

A number of deeply ingrained myths may harm your ability to make investment decisions. The most common four myths about RSP include:

1. RSP is always a better option than lump-sum investing

According to a Vanguard study published in 2012, lump-sum investing (LSI) beats dollar-cost averaging (i.e. RSP)  about two-thirds of the time in the United States, the United Kingdom, and Australia.

Morningstar conducted a similar study in 2019. It was found that RSP usually performs best in periods with negative total returns and leads to weaker results when total return is positive.

In summary, both RSP and LSI have pros and cons. As a low-risk strategy, an RSP features easy execution, and the returns brought by it are usually in proportion to the risks.

2. Stop an RSP when the market goes down

A volatile market tends to keep investors from continuing an RSP, but the fact is, if you are not confident about predicting market trends, it may be better to stay patient and stick to the RSP.

3. There's no chance of losing money in implementing an RSP

If you happen to have invested in an underperforming fund, you may suffer a loss when a downtrend lasts relatively long.

Creating an RSP does not mean you can rest assured and wait to secure returns. Instead, you should keep updated with the fund performance and market trends. When you realize that the fund you invested in is not a wise choice, you should consider switching to other funds. That being said, if the underperformance of a fund is due to market volatility rather than the fund itself, sticking to an RSP would still be a wise choice.

4. The higher contribution to an RSP, the more returns

The contribution each time you make to an RSP should match your investment goals and your financial standing. If there's a mismatch, it is likely that you may have to suspend the RSP due to an increasing financial strain.