Nadeem Umar 5 December 2018
Recent political and global uncertainties have caused some wobbles in the UK stock market. But a falling market doesn’t have to be entirely bad news.
Investing small amounts on a regular basis could help make the most of more challenging times. And investors can get started from just £25 a month.
Timing not your thing? How investing monthly can help
First time investors and fund managers alike can agonise over when to invest, especially when it looks like the market’s unappealing. But the truth is you can never really know. Markets will inevitably rise and fall, and it’s very hard to predict the exact best time to put your money in the market.
And often when the market’s making investors nervous, they choose not to invest at all. History tells us that isn’t always the best thing to do.
Over the last 20 years, if investors had missed out on just the ten best days in the market, their returns – including dividends - would have been around 61% instead of 181%. This shows how continuing to invest over the long term – and all the peaks and troughs that come with it – doesn’t have to end in bad news, but there are no guarantees this performance will be repeated.
Investing on a monthly basis could help make sure you keep investing when you might otherwise have waited for a “better” time to come along.
But aren’t there too many unknowns to invest at the moment?
There are a lot of things up in the air right now. No one really knows what Brexit will mean for the economy, or what the markets might look like in the medium-term.
But there are a few reasons why drip-feeding money into investments each month could help smooth the ride.
First of all, when you drip feed money in to the market, your loss is smaller if your investment is impacted by a market sell-off.
At the same time – if the market has fallen, your money will be able to buy more units because prices will be lower. However, it works the other way too – if the market is at a higher point, you won’t buy as many units at this less attractive price.
By spreading the cost like this, in a falling market the average you pay for your investments over the long term is lower. There’s less overall risk to your wealth this way, with the potential to benefit more in the future. Remember all investments can fall as well as rise in value, so you could still get back less than you invest.
So how could investing monthly smooth things out?
Take a look at the below graph. It shows the performance of a lump-sum investment of £6,000 in the FTSE All-Share, compared with a regular investment of £50 a month over a ten year period. Charges and inflation haven’t been taken in to account.
The regular investments had a much smoother path than the lump sum.
Of course, investing a lump sum can mean bigger returns.
We’re not saying a regular investment will solve all your worries, but it means the ups and downs are less dramatic, which could help your peace of mind.
Investing monthly vs. lump sum over 15 years
Past performance isn’t a guide to the future. Source: Lipper IM, 31/10/2008 – 31/10/2018.
How can I set up a regular investment?
You can choose to invest in funds, FTSE 350 shares or eligible investment trusts and ETFs. It’s possible to set up a direct debit from just £25 a month, making this a popular and affordable way of building an investment portfolio.
This article isn’t personal advice. If you’re not sure if an investment is right for you please contact us for advice.