Is spreading your investment the road to success?
The problem with investing a lump sum amount in one go, is the timing of the stock market.
The problem with investing a lump sum amount in one go, is the timing of the stock market. If it is high then it will be a while before those investments increase further. Making smaller regular payments by drip-feeding money into your investments on a monthly basis can be a much better and highly effective strategy. Here we highlight some of the main benefits of investing smaller amounts on a regular basis.
Getting ‘pound cost averaging’ right
Investors are not happy when they experience falls in their values. However, short-term falls in share prices can actually provide opportunity and prove advantageous over the long-term for regular savers. By investing smaller amounts every month, investors average out the buy price of investments and benefit from a phenomenon known as ‘pound cost averaging’. This means your investment buys more units or shares when the price goes down, as per the table below and allows you to benefit from bigger returns if and when the share price recovers.
Month- Amount Investment- Share Price - Number of Shares
1 £100 £5.00 20
2 £100 £4.00 25
3 £100 £2.50 40
Based on the table above, the average price purchased over the 3 months is £3.53 per share which is £300 investment divided by 85 shares. However, if you had invested the full £300 lump sum in one go during the first month, you would only have received 60 shares, which is £300 investment divided by £5.00. Of course had the market risen each month, your monthly investment would have bought fewer shares and actually have been worse off than if you’d invested a lump sum at that time. It is fair to say, investing is as much about timing as picking the right stock.
Benefits of regular savings
Some people believe that you need lots of money to start investing. In fact, drip-feeding money into investments over a longer period of time can build a very substantial sum. If you invested £250 per month for ten years, you would have a total of over £37,500 (based on a medium growth rate and a 1% charge).
Affordability - you can start investing from as little as £25 per month and it often costs no more in dealing charges
No fear - Instinctively you will watch the shares as the move up and down and probably want to buy quickly and more when shares are rising and less when they are falling. With smaller investing the money can be automatically taken from your bank account via direct debit and invested every month, regardless of price and movement, which removes the fear factor.
Flexibility - you can alter your investment choices and the amount you invest from month to month. You can even suspend payments for a period if you wish.
The sooner you start the more you will have invested on share platforms, you can choose to invest monthly into a wide selection of investments including, FTSE shares and eligible investment trusts. It’s easy to get started and you can set up a direct debit with some companies from just £25 per month and drip-feed money into your investments. You can also set up a regular savings instruction into Stocks & Shares ISAs, Fund & Share Accounts, SIPPs, Pensions or a Junior Stocks & Shares ISAs with many companies.
The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitability of an investment.
This guide and article are not advice. If you are unsure of that suitability of an investment for your circumstances please seek advice. Once held in a pension money is not usually accessible until age 55, which is rising to 58 in 2028.
Need more help? This feature aims to give some informal hints. If you are unsure of the suitability of an investment for your circumstances please contact McPhersons Financial Solutions for a free meeting [email protected] or call 01424 730000.