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BLOG: Early bird investors catch returns

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Written by: Andy Parsons, head of investment research and advisory services, The Share Centre
08/06/2015
Investors are continually bombarded with advertising and promotional material highlighting the fact that, once the tax year runs out, our allowance for the previous year is gone. But despite this, many of us still put off until tomorrow what can be done today.

To avoid regrets, why not consider being an early bird investor? There are plenty of advantages to taking such an approach. First and foremost, the annual allowance has increased. From April, investors will be able to contribute up to £15,240 into an ISA for the 2015/2016 tax year.

While the media has focused on the high value of this £15,240 sum, for the vast majority of personal investors, the new allowance can appear daunting and beyond our means. Perhaps this is why many investors still shy away. But simply put, anything is better than nothing and investors can accumulate large investment pots from relatively small investments.

Why the wait?

In a life where death and taxes are the only two certainties, why do so many forgo the opportunity to participate in an investment vehicle that produces an income free from further taxation? The answer is that many investors still don’t know how much, or when, to invest.

It will not have escaped your attention that the stock market has been on an upward trajectory for the past year or so, with the FTSE 100 reaching an all-time high in March – just at the time when investors were being advised to use up last year’s allowance. Just like the housing market of many years ago, the one thing investors don’t want to do is pay over-inflated prices and then feel they’ve lost money the moment the stock market falls back. However, it is worth remembering that until investments are actually sold, all losses are only paper losses.

So, how do you go about investing and avoiding stock-market uncertainty? The best way to overcome these concerns is to drip- feed money into an investment (otherwise known as pound cost averaging). We can all fully appreciate that investing within the stock market via equities or via a fund is undoubtedly riskier than investing in cash, but in order to make our money work harder, investors have to consider a higher degree of risk. Savings rates will eventually rise with interest rates, but probably not to the extent that cash investments will provide satisfactory returns.

Little by little

Those of us with money sitting in low-returning interest accounts should definitely consider drip-feeding small amounts into an ISA. We all make a variety of regular payments every month – mobile phone bills are a great example – and after a short while we don’t even notice them. So why not do the same with your investments? It’s much easier to justify regular payments, and unlike your monthly phone bill, an ISA can generate an additional source of income.

All too often, it’s easy to forget the benefits afforded by pound cost averaging. By contributing little and often, the purchasing power of an investment will eventually allow you to buy more shares, bringing down the average cost per unit. And for those new to investing in the stock market, this helps alleviate some of the fear, as the best times to purchase are during periods of market volatility and weakness.

Regular investing may not be for everyone, but for those with a smaller amount to invest, a regular investment approach may well be worth consideration.

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