For much of 2024, interest rates were above 5% and the markets have experienced ups and downs which might have made you tempted to prioritise cash savings, seeing them as a safer option. However, for long-term savings goals, relying on cash savings alone may not yield the returns you need. This is where the strategy of regularly investing smaller amounts can be highly beneficial.
Instead of investing a large lump sum all at once, making regular, smaller contributions allows you to buy fewer investment units when prices are high and more when prices are low. This approach helps smooth out price fluctuations over time, making it a practical option during periods of market volatility. It also lowers the chance of investing a large amount right before a market downturn.
If you invest a lump sum just before prices drop, you’ll be buying at a high point and missing the chance to purchase more units at lower prices. This can lead to lower overall returns.
Even seasoned investors understand that timing the market – selling before prices drop and buying just before they rise – is almost impossible, especially when markets are volatile and can swing dramatically from one day to the next.
While all investments carry the risk of losing value, regularly investing smaller amounts instead of committing to a large lump sum can be less intimidating and provide a more stable path toward your financial goals.
Example: £100 per month vs. £1,200 lump sum investment
Let’s compare two investors:
Investor A invests £100 every month, totalling £1,200 across the year.
Investor B invests a £1,200 lump sum at the beginning of the year.
Investor A, who invested regularly, purchased more units overall (270 units vs. 240 units) due to taking advantage of fluctuating prices, buying more units when prices were lower.
Investor B, who invested a lump sum, bought all units at the initial higher price (£5.00).
By the end of the year, Investor A’s portfolio is worth £1,296, compared to Investor B’s portfolio which has decreased in value to being worth £1,152.
This demonstrates how regularly investing smaller amounts can lead to better outcomes during periods of market volatility by averaging out prices.
When Might Regular Investing Not Beat a Lump Sum?
If markets are steadily rising, investing a lump sum at the start would allow you to purchase investments at a lower price. Over time, this could potentially lead to higher returns compared to spreading your investments across multiple months.
However, the reality is that markets often experience ups and downs, and predicting when they’ll stop rising or start falling is nearly impossible. Regular investing offers a practical approach to reduce the risk of mistiming the market and allows you to benefit from price fluctuations.
A common example of regular investing is contributing to a pension through your employer. Many people engage in this form of systematic investing without even realizing it. Setting up regular payments not only helps you build wealth steadily but also builds a disciplined investment habit.
Some people will opt to invest lump sums annually, which would still be deemed as regular investing.
If you’re feeling uncertain about market volatility and its impact on your financial goals, it might be worthwhile to consult a financial adviser for guidance.
To get a free initial consultation, head to https://www.charlesjames.com/contact-us and fill in the information form, or call 01246 296060.