Why you should invest monthly rather than pay in a lump sum

Written by:
It’s the time of year, as the end of the tax year approaches, when savers rush to use up their annual ISA allowance.

But studies suggest people investing in stocks and shares ISAs are better off drip feeding their money in monthly rather than depositing their cash in one lump sum.

One such study by fund group Fidelity International looked at the investing habits of three hypothetical investors – ‘Steady Eddie’, ‘Bad Timing Bob’ and ‘Good Timing Gary’.

Steady Eddie began investing regularly in the FTSE All Share in 1986, putting in £1,000 a year during that decade and bumping up his annual investments by £1,000 each decade until January 2017. His original investment of £85,000 grew to £262,759.

Bad Timing Bob invested in the FTSE All Share at the top of the market, just before market downturns. Like Eddie, Bob saved £1,000 a year, upping his annual savings by £1,000 each decade, but due to Bob’s poor timing, his original investment of £85,000 was only worth £136,363. While still a 62% return, it is £126,396 less than Steady Eddie.

Good Timing Gary, who only ever puts his money into the FTSE All Share when the market is at its lowest also set aside £1,000 a year, increasing his annual savings by £1,000 each decade. Gary’s original investment still only returned £218,388 – over £44,000 less than Steady Eddie.

Tom Stevenson, investment director for personal investing at Fidelity International, said: “If there is one key lesson to be learnt from the story of Bob, Eddie and Gary, it’s that time in the market is far better than timing the market. In particular, as poor Bob demonstrates, the consequences of trying to second guess the market and getting it wrong can be very expensive.

“Over long periods, stock markets have tended to rise and that means that putting your money to work in the market and keeping it there has generated better returns even than those achieved by the best market timer. Even if you could pick your moments with skill (or even luck), leaving your money earning a paltry rate of interest while you wait for the right time to invest can seriously compromise your long-term returns.

He added: “Our analysis shows that the most sensible approach is to stay invested and to drip feed your savings into the market month after month. By investing your money into the market regularly, you will benefit from a process known as pound-cost averaging.

“This means that you buy more units in your investments when prices are low and fewer when prices are high. Buying at a variety of prices and spreading ongoing investments over time also helps to cushion your portfolio from dips in the stock market. Furthermore, by investing regularly over a number of years, you’ll benefit from the phenomenon that is compounding – the snowball effect of generating returns on your previous returns.”

There are 0 Comment(s)

If you wish to comment without signing in, click your cursor in the top box and tick the 'Sign in as a guest' box at the bottom.

Are you a first-time buyer looking for a mortgage?

Look no further, get the help you need by searching for your perfect mortgage

Which ISA is right for you? A round up of the six products available in 2017

From cash to innovative finance to lifetime, here's our guide to the ISA products available to savers this yea...

Guide to buy-to-let tax changes

In late 2015, former Chancellor George Osborne announced a range of  tax measures aimed at landlords, which t...

A guide to switching energy provider

All you need to know about switching from one energy supplier to another.

What will happen if rates change

How your finances will be impacted by a rise in interest rates.

Regular Savings Calculator

Small regular contributions can build up nicely over time.

Online Savings Calculator

Work out how your online savings can build over time.

Five fund tips for a 0.25% interest rate environment

With interest rates stuck at a record low 0.25% and expectations rates could fall to close to zero, here are ...

Protecting family wealth: 10 tips for cutting inheritance tax

Inheritance tax - sometimes known as 'death tax' - can cause even more heartache for bereaved families. But th...

Travel insurance: Five tips to ensure a successful claim

Ahead of your summer holiday, it’s important to make sure you have the right level of travel cover or you co...

Investing your money

Alliance Trust Plc gives you smart insight into how to invest your money

Money Tips of the Week

Read previous post:
Motorists unaware of law changes this week for driving using a mobile 

Two fifths of drivers aren’t aware of tougher penalties coming into force this week for driving using a mobile phone.