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Why regular investing is a valuable ally
7 min read 11 Mar 20
Summary: It is not uncommon to have a sum of money that you decide to invest for your future. While it is important to know where to invest it, how you choose to do so is vital.
An easy mistake that investors make is to wait for ‘the right time’ to buy. After all, it is never obvious when markets are at their nadir and assets at the cheapest.
Take the first couple of months of 2020, for instance. Only weeks after hitting all-time highs in January, global stockmarkets plunged rapidly as coronavirus continued to spread around the world. The UK and US stockmarkets suffered their worst one-day falls since the financial crisis, more than a decade ago, illustrating the degree of volatility afflicting markets.
With investor sentiment waxing and waning, how can you possibly spot the moment when markets eventually might turn? Unless you can reliably predict the future, trying to time the market is usually a fool’s errand.
There is one proven strategy that can help, though. By topping up your investments regularly, you can reduce the danger that you pick your moment unwisely and end up worse off.
The case for regular top-ups
Investing at regular intervals not only instils a good savings discipline. It can also deliver a material benefit.
If you choose to invest a fixed amount each month – irrespective of whether markets are in a funk or enjoying a purple patch – it can help you avoid overpaying for an asset when its price is peaking.
In many cases, you will end up better off over the long run – unless markets defy gravity and rise continuously – compared to if you invest in one go. This is because you're using an investment technique known as ‘pound-cost averaging’.
Let’s say, for example, you invest £100 a month in a fund over a year. Since the value of investments will fluctuate over time, the price of shares in the fund will rise and fall. From month to month, your £100 will buy a different number of shares, depending on their value at that time. You therefore end up buying more shares when they are cheap, and fewer when expensive.
The result is that the average price you pay for an asset can be lower than if you’d made one lump sum investment. And the lower your ‘cost to invest’, the greater your potential rate of return becomes.
Pound cost averaging in action
| Month | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Share Price |
£10 | £11.11 | £12.50 | £12.50 | £11.11 | £10 | £9.09 | £8.33 | £6.67 | £8.33 | £9.09 | £10 |
| Buys £100 |
10 Shares |
9 Shares |
8 Shares |
8 Shares |
9 Shares |
10 Shares |
11 Shares |
12 Shares |
15 Shares |
12 Shares |
11 Shares |
10 Shares |
In this illustrative example, your £100 a month would buy 125 shares at an average cost of £9.60. The average price of shares over the year was £9.89.
Whether you would have been better off instead investing the total sum of £1,200 in one go would depend, as in real life, on timing. Had you invested the lump sum between July and November, you would have accumulated more shares than from investing regularly.
Investing in a falling market
The prospect of investing your hard-earned money only to see its value fall is a little disconcerting. While this is always a possibility when you invest, it can feel more likely when markets are sliding.
Assuming an investment is suitable for your circumstances and appropriate to your needs, it is almost impossible to call the best moment to invest. Ultimately, whether the price of an asset has recently fallen or risen should have little bearing on where it is heading in the future. This will hinge instead on its longer-term prospects.
The time when you feel most confident may not ever arrive, meaning you could end up missing out on potential gains. If you are happy to put some of your money at risk in the first place, committing to a regular investment plan – whether to top up or start a new investment – could help overcome any such paralysis. Better yet, you will have a valuable ally in pound cost averaging.
The views expressed in this document should not be taken as a recommendation, advice or forecast.
When you're deciding how to invest, it's important to remember that the value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
The views expressed here should not be taken as a recommendation, advice or forecast.
The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested.