If you ask anyone involved in the financial sector the best time to start investing money, they’ll probably say “yesterday”, with the second-best time being today.
One of the fundamental principles of investing is to put your money to work as soon as possible. All investments need time to accrue, so the longer your money is invested, the more chance you have of reaping a good reward from your investment commitment.
It’s possible you may not have access to lump sums of money to invest but read on to discover four good reasons why regular saving can be effective.
1. Investing regularly is a good habit to get into
One of the most overused investment adages is that successful investing is all about time in the market, not timing the market.
Even the most experienced investor has no idea exactly when markets, or individual fund and share prices, will rise and fall. A sudden drop in a value doesn’t automatically mean the price won’t drop further.
Because there are so many different factors in play, it can make sense to make regular investments, without worrying about prices and values.
Investing regularly, rather than trying to time a lump sum investment can help you become a more disciplined investor.
2. Regular investing takes the emotion out of the process
By paying in regular contributions, you’re automatically investing money, regardless of whether the price you’re paying is high or low.
In reality, if your regular investments are made by direct debit into the same fund, you won’t really notice the price at all.
This takes some of the emotion out of investing, and effectively turns it into a straightforward everyday routine.
It also means you aren’t obsessively monitoring fund and share prices, with the resultant increase in your stress levels as you try to work out whether or not to invest.
The best approach is to save regularly, and then check the value occasionally – but not too often.
3. Regular saving makes it easier to invest
Not everyone has substantial lump sums of money to invest. But most people are able to find regular smaller amounts to set aside for investment purposes.
As you’ve already read, the key is to get into the investment habit and to get your money invested as soon as you can. The ideal way to achieve this is to make smaller monthly contributions.
Many investment platforms allow you to make regular contributions and to increase the monthly payments as and when you see fit, as well as make additional one-off contributions.
4. You could benefit from pound-cost averaging
The nature of markets means that prices fluctuate. The value of shares in businesses, or investment funds in different sectors, are affected by a multitude of different factors – both positive and negative.
This means that markets rarely move in a straight line.
By investing on a regular basis over an extended period, you’ll buy shares or units at a range of prices. So, you effectively pay the average price over that period, which can help smooth out market volatility. This concept is known as “pound cost averaging”.
It also means you can benefit from purchasing shares when the price is low, and then benefit when the value increases.
You can see the effect of this in the following simple example:
- Your first monthly contribution is £500, and the share price is £5 so you buy 100 shares
- Next month the share price has fallen to £4.60 so your £500 buys you 108.7 shares
- This means you now hold 208.7 shares in total
- If the share price then returns to £5 your shares are worth £1,043.50.
So, even though the share price hasn’t increased above the initial amount you paid at outset, you have profited by purchasing cheaper shares with your second contribution.
If you extrapolate the effect of pound-cost average over an extended period, you can see how you can benefit from its effect, even when share prices are falling.
Also remember that valuable dividends could be paid on the number of shares you hold rather than their value. So, all the time you’re buying shares – regardless of the price – you’re increasing your potential dividend earnings.
There’s nothing wrong with lump sums
Clearly, if you do receive lump sums of money such as tax refunds, gifts, and through the sale of an asset, there’s nothing whatsoever wrong with investing it.
Regardless of whether you invest regularly on a monthly basis or in occasional lump sums, investing is an effective way to put your money to work and potentially build your wealth.
It gives you a better chance of the value of your money growing at a better rate than inflation and increasing in value in terms of its buying power.
Get in touch
At bdhSterling, we have a wealth of experience in helping clients with their investment strategy.
Get in touch to find out how we can help you.
Please note
The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.
