BLOG: The power of regular investing
Pointing to March 23rd 2020, the market low point after COVID-19, he asked ‘why didn’t you tell me to invest then?’
This is not an uncommon question, especially for first-time investors. It’s right up there with ‘what if the market crashes tomorrow?’. The problem is that investing at the bottom or avoiding market crashes is only possible in hindsight.
So how do you know when to put your money in the market? Ask any fund manager how they invest and you’re likely to receive the same answer: start soon and invest regularly. As well as being convenient, it’s arguably one of the best strategies for maximising returns.
Firstly, starting early and investing regularly means you can benefit from compound interest. Compound interest is something you hear a lot about, but very few people understand just how powerful it is. If you invested £500 per month from the ages of 16 to 21 in a fund delivering 5% per year and didn’t make any further contributions for the rest of your life, you would have almost a quarter of a million pounds on your 60th birthday.
Conversely, starting on your 30th birthday, you would have to invest that £300 every month until you were 60 years old in order to have half a million pounds. Warren Buffett once said that compound interest was one of the three keys to his investment success, and from the above you can see why.
Secondly, investment professionals know that regular investing helps to smooth losses and means that investments bounce back faster after dips in the market. This is due to ‘pound cost averaging’ where you continue to invest in falling markets, and therefore buy stocks and shares when their prices are low. This lowers the average cost of investments in a portfolio and means that the percentage decline in portfolio value is significantly reduced.
Another reason why fund managers follow a regular investment schedule is that it allows them to pick up bargains as selling by panicked investors causes a share price to dip. When prices start to fall, people can begin to act irrationally and either pull their money out or refuse to enter the market altogether. In reality, this is often the best time to buy, as fear has caused prices to become artificially low. By simply investing on a regular basis, you don’t have to actively think about buying during market dips, it happens automatically.
Making regular contributions to investment funds also avoids the temptation of trying to ‘time’ the market, which often results in missed opportunities. Some people will spend months agonising about when they should be putting money into the market – wanting to find the perfect entry point. In reality, it’s incredibly difficult to perfectly time your investment and it’s only possible to pinpoint ideal entry points after the fact. It’s for this reason that fund managers drip their investments into markets over time, and it makes sense for individual investors to do the same.
Finally, investing regularly builds good habits and any fund manager knows the power of habitual behaviour. The longer you invest for, the greater the benefits are. Regular monthly contributions, regardless of size, will build up over time. Ideally, the amount you invest should be a fixed portion of your income, so as your income fluctuates over your life, you can continue to build your nest egg.
Regular investing is a powerful way to build wealth, and the sooner you start the better. With time and regular investing on your side, you can ride out the short-term volatility and avoid the pitfalls of trying to time the market.
Hugo Thompson is a multi asset investment specialist at HSBC Asset Management.