Why drip feeding your money is better than investing lump sums
Looking at three hypothetical investors – ‘Steady Eddie’, ‘Bad Timing Bob’ and ‘Good Timing Gary’, Fidelity International analysis found there’s a difference of £113,000 in the returns achieved based on their investment habits.
Steady Eddie: invests regularly
The analysis shows that Steady Eddie, who 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 2016, would have seen his original investment of £82,000 grow to £233,800.
Bad Timing Bob: invests at the top of the market
Bad Timing Bob, who only invests in the FTSE All Share at the top of the market, is left with nearly half as much. Like Eddie, Bob saves £1,000 a year, upping his annual savings by £1,000 each decade, but unlike Eddie, he invested the money he saved in the FTSE All Share just before market downturns. As a result, Bob’s original investment of £82,000 would be worth £120,970.94. This is an increase of 148%, but it’s nearly £113,000 less than Steady Eddie.
Good Timing Gary: invests at the bottom of the market
He only ever invests in the FTSE All Share when the market is at its lowest, but he’s unable to match Steady Eddie. Just like Eddie and Bob, Gary sets aside £1,000 a year, increasing his annual savings by £1,000 each decade. His original investment would have returned £188,893.13 – nearly £45,000 less than Steady Eddie.
Time in the market better than timing the market
Tom Stevenson, investment director for personal investing at Fidelity International, said: “Bob, Eddie and Gary teach us some important lessons about investing. The first is obvious – good timing is better than bad. Unfortunately, we know that consistently effective market timing is nigh on impossible.
“The second, and more useful, lesson is that time in the market is better than timing the market. 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 can pick your moments with skill, leaving your money idle while you wait for the right time to invest can seriously compromise your long-term returns.
Stevenson added that the most sensible approach is to stay invested and to drip feed your savings into the market month after month to benefit from pound-cost averaging – you buy more shares when prices are low and fewer when they are high as this allows your money to be compounded.