Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
The pros and cons of investing in the same things every month
Investors often have the best intentions when it comes to their portfolios but topping up an ISA or other investment account can easily slip down your list of priorities. Fortunately, setting up a regular investment plan can get you into good habits with none of the hassle.
Investment websites usually offer the option to save small, regular amounts into your portfolio. The associated fee is typically £1.50 per investment which is much lower than a normal dealing charge in the region of £9.95.
AJ Bell Youinvest, for example, lets you save as little as £25 a month into a range of stocks, funds, ETFs and investment trusts via its regular investing service. You select the required products in which you would like to invest each month, and state how much you would like to invest.
You need to make sure you have enough cash in your account to pay for the regular investments each month, otherwise the transactions won’t complete. Most stockbrokers and investment platform providers will process the deals on the same day each month.
Fees are typically lower than you may pay for a one-off trade because investors’ money is pooled by the provider to reduce trading costs.
You could set up a direct debit to fund your investment account so the cash arrives each month ahead of the regular investment being processed.
Starting small might not seem worthwhile but these regular amounts soon build up. But if you opt for the minimum monetary amount of £25, just remember that your dealing fee works out as 6% of your investment each month. You may be better off putting a greater amount of money, such as £100 or more, if you can afford it, as the fees would be a much smaller percentage of your investment.
REGULAR SAVING BENEFITS
Patrick Connolly, certified financial planner at Chase de Vere, says: ‘Many people use regular savings to help meet long-term financial goals such as putting money into a pension or saving for children.
‘One major advantage is you might not notice small, regular amounts automatically taken out of your payslip or bank account so will likely maintain them over time.’
Investing in this way has other benefits too. Investors are prone to buying at the top and selling at the bottom of the market – it’s easy to become confident when a fund has had a good run and to get spooked if it has a period of underperformance.
But regular saving takes the emotion out of investing because you don’t have to make an active decision about when to put your money into a fund.
As a result, many regular investors may find they fare better than those who put in ad-hoc lump sums. This is because they benefit from something known as pound cost averaging where you end up buying more units or shares when they are priced cheap and fewer when they are expensive, and you keep investing through the bad times as well as the good.
Connolly adds: ‘Regular saving is often the best way for novice or cautious investors to put money into the stock market as it negates the risk of market timing and hopefully allows them to sleep easier at night.
‘If there are significant market falls then people simply buy their investments cheaper the following month, thereby reducing their overall average buying cost.’
For this reason, the strategy can be particularly useful when investing in volatile assets or regions which may be prone to sharp swings up and down, which can make many people nervous.
DOWNSIDES TO THIS APPROACH
Those able to invest their entire ISA allowance at the beginning of the tax year, for example, may do better than those who drip-feed it into the market over 12 months simply because the money has more time in the market to grow.
For example, if you invested a lump sum of £10,000 and it grew at 5% a year for 10 years, you would end up with £16,470. By contrast, if you invested £83.33 a month for a decade and it grew at 5% a year, you would only end up with £12,940.
However, if markets fell significantly the regular saver could be better off – which may mean this is a good strategy for more nervous investors.
But it’s worth bearing in mind that, while trading charges for regular investors are low, they can add up. If you have 10 stocks in your portfolio and it costs £1.50 a month to save into each one, that is £15 a month and £180 a year. Lump sum investors will only be charged once, although for the same portfolio they could pay £9.95 multiplied by 10 which is £99.50.
And, while it is convenient to set up your regular investment plan and forget about it, there is the risk you forget about it for too long and end up with an unbalanced portfolio or one that is no longer appropriate for your aims and risk appetite.
Alistair Cunningham, director at Wingate financial planning, argues: ‘The benefits of regular investing are discipline and reducing the risk of ‘buying high’ but if you expect investments to rise over time – and if you don’t then why invest? – it is generally best to use your allowances as soon as the tax year starts.’ (HB)