Not everyone has a large lump sum to invest, and for those that do, it can be daunting to commit it all in one go.
Fortunately, if you want to invest little but often, or you feel nervous about markets in the shorter term, there is an alternative. You can contribute smaller amounts into Stocks and Shares ISA or into a Self Invested Personal Pension (SIPP) as and when you like, or set up regular savings from your bank account.
Almost anyone has the potential to build a sizeable sum over time by investing small amounts regularly. The important thing is getting started, and the earlier you do, the more time your chosen investments have to grow – time can be an exceptionally powerful ally.
Time on your side
Take two investors, both investing for retirement in 40 years' time. One starts investing £100 per month right away, the other does nothing for 20 years, but then invests £300 per month. The investments chosen both grow by 5% per year after charges. At retirement, the first investor will have spent £48,000 on their monthly contributions and the second investor £72,000. Yet despite having spent much less, the first investor's retirement pot would be worth £152,252 compared to the second investor's £123,310.
Even if you don't have a multi-decade time horizon it's still possible to build up a significant sum by saving regularly. In addition, regular savings are flexible, so you can stop and start them as you wish or change the amount. You can also change where you invest to suit your views and the level of risk you want to take.
A regular investor doesn’t fear the future
By investing a given amount in a fund regularly you end up buying at different prices. Dips in the market, particularly in the early years, could even work to your advantage provided you have committed to investing for a lengthy period. If your chosen investment have become cheaper to accumulate it means your investment buys more shares or units to keep for the long term.
For example, if you invest £100 every month into a fund, the cost of the units for each purchase will depend on how the assets in the fund have performed. For example, if in month one the units cost 50p each you would get 200 units for £100 invested. If in the second month they are 54p each, you would get 185 units for the same amount of money, but if they dip to 40p, you would get 250 units.
By investing monthly in chunks, rather than a larger lump sum in one go, an investor ends up buying more shares or units when prices become cheaper and fewer when they become more expensive. This can be a great way to invest because if you keep buying the market falls you could, over time, turn volatility to your advantage. This effect is known as 'pound cost averaging', and over longer periods it can help smooth out the highs and lows of the market; though there are still risks and with all investments, you could get back less than you put in.
Cut out the noise
Another important aspect of committing to regular savings is that it takes away the decision making about when to invest. It removes concerns about timing the market, whether it’s expensive or about to fall, and enforces a healthy discipline of investing at all times – good and bad. By stripping out the constant ‘noise’ of the market and economic news from your thinking and simply investing mechanically each month it can also make life a lot easier!
Many investors use regular savings with the aim of building a pension pot, putting aside money for children or to pay off a mortgage, but whatever your goal the earlier you start the easier it should be to reach your objective.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.