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The benefits of regular investing
Find out how regular investing can help you navigate market ups and downs.
With interest rates now above 5% and markets still seeing periods of ups and downs, you may be nervous about investing and keen to have more of your money in what you see as the safe haven of cash savings. However, when it comes to longer-term savings such as your pension, you need to consider whether cash savings will give you the returns you need to meet your financial goals. This is where regularly investing smaller sums of money can be really helpful.
By making regular payments into investments rather than investing a lump sum all at once, you’re buying fewer investment units when prices are high and more when prices are low, essentially averaging out prices. This is why it’s often seen as a good approach when markets are volatile. Plus, it removes the worry of making a lump sum investment right before a market fall.
If you invest a lump sum just before a market fall, you’ll be buying when prices are high, and you’ll miss out on the opportunity to buy more units at a cheaper price. This means that your returns are likely to be lower too.
Even experienced investors know that it’s almost impossible to time the market – sell investments just before prices go down and buy them just before they go up. And this is particularly true during periods of market volatility when you could see big rises one day and equally big falls the following day.
So, although with any investment approach the value of your investments can go down as well as up, and you could get back less than you paid in, regularly investing smaller amounts, rather than investing a large lump sum all at once, can feel less daunting.
Let’s look at an example
Investor A invests £1,000 a month over 12 months, while investor B invests a lump sum of £12,000 in January. Over the year, the market rises and falls, meaning investment prices also rise and fall.
| Month | Unit price | Investor A | Investor B |
| January | £2.00 | £1,000 | £12,000 |
| February | £1.91 | £1,000 | |
| March | £1.74 | £1,000 | |
| April | £1.70 | £1,000 | |
| May | £1.65 | £1,000 | |
| June | £1.57 | £1,000 | |
| July | £1.52 | £1,000 | |
| August | £1.57 | £1,000 | |
| September | £1.61 | £1,000 | |
| October | £1.65 | £1,000 | |
| November | £1.74 | £1,000 | |
| December | £1.83 | £1,000 |
| Investor A | Investor B | |
| Total units bought | £7,077 | £6,000 |
| Average price paid | £1.71 | £2.00 |
| Final value | £12,923 | £10,956 |
By December, investor A has bought over 1,000 more investment units and paid a lower average price than investor B. In addition, the value of their plan is almost £2,000 more.
When regular investing may not give you a better outcome
If markets are rising, investing a lump sum from the start would mean you’d be buying investments at a lower price, which in turn could potentially mean higher long-term returns.
However, ups and downs are part of investing and no one can say with any certainty when markets will stop rising. So regular investing can be a useful approach to make sure you don’t buy at the wrong time and are able to take advantage of market ups and downs.
Making monthly contributions to a pension via an employer is a form of regular investing that many people do without realising. So setting up regular payments is a good way to instil a disciplined and systematic approach to investing.
If you’re worried about market volatility and the impact on your investments, now could be a good time to speak to a financial adviser.