Ideas for the ISA season: Lump sum or regular contribution?

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Written by: Andy Parsons, head of investment research, The Share Centre
04/03/2015
As the clock counts down to 5 April, investors will be urged to use their current £15,000 2014/15 ISA allowance before the tax year runs out, based on the premise that once it’s gone, it’s gone forever.  

However, for the majority of investors, squirrelling away £15,000 per year is impossible, but this should not be a deterrent. Anything is better than nothing and from little acorns can grow large investment pots.

In a life where the only two certainties are death and taxes, why do so many people choose not to participate in an investment vehicle where all the profit and income is free from any further taxation – an ISA?

Many investors will ask how much do I invest and when should I do it?  The stock market goes through times of volatility and is currently on an upward trajectory, close to an all-time high, and just like the housing market of many years ago, the one thing we don’t want to do is pay over-inflated prices. A way to avoid this and to overcome such concerns is to drip feed money into an investment, thereby benefiting from an phenomenon called pound cost averaging.

For example, if an investor has £6,000 sitting idle in a savings account, it can be more beneficial to drip feed £500 per month into an ISA, than invest the full amount at one time. By making investments on a regular basis, you average out the price at which you purchase each ‘slice’ of the investment and, in doing so, avoid having to worry about the level of the market.

When a share price is falling you buy more shares, and when the share price is rising you buy fewer shares. The end result is that you pay an average price across your total holding in that company and along the way you’ve largely avoided market volatility. By contributing a little and often, the purchasing power of an investment will over time, eventually lead to buying more shares and bring down the average cost per unit. The table below shows the benefits and additional shares of such an approach which can be very fruitful.

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We all undertake a variety of regular payments every month, none more so than our beloved mobile phone, so once established the frequency of payment becomes the norm and part of our lives. So why not do the same with an ISA?  It’s much easier to justify and can feel comfortable with a regular payment rather than having to find and potentially justify investing a lump sum.

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