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

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27/02/2017
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.”

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