Why not try investing smaller amounts on a regular basis
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.
Getting ‘pound cost averaging’ right
Investors aren’t 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.
Based on the table below, 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 have only 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.
Benefits of regular savings
Some people believe that you need lots of money to start investing. In fact, small amounts 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).
You can start investing from as little as £25 per month and it often costs no more in dealing charges.
Instinctively you will watch the shares moving up and down and probably want to buy quickly and more when shares are rising and less when they fall. 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.
You can alter your investment choices and the amount you invest monthly. You can even suspend payments. You can choose to invest monthly into a selection of investments including, FTSE shares and eligible investment trusts. It’s easy to get started by setting up a direct debit, with some companies from just £25 per month. You can set up a regular savings instruction into Stocks & Shares ISAs, Fund & Share Accounts, SIPPs, Pensions or a Junior Stocks & Shares ISAs with many companies.
Written by Mark Eaton.
Financial Solutions Advisor