Should I invest regularly or pay in a lump sum?

15 November 2011

The stockmarket can be a turbulent place. At times, we all want to do whatever it takes to minimise volatility. One way to do this is by investing small, regular amounts, smoothing out the peaks and troughs of the market in the process.

But is this the best approach for growth?

Understandably, many people believe that regular investment is better than lump sum investment, because investing a single amount leaves you vulnerable to buying at the top of the market.

People tend to adopt a herd mentality when it comes to investing, buying when everyone else is and when the market is at its highest. Regular investing can help you avoid this.

Lower risk

"Regular investing each month gives you a lower-risk profile by helping to smooth out some of the stomach-churning highs and lows in the price of shares," says Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC).

"Known as 'pound cost averaging', it means investors buy fewer shares when prices are high and more when prices are low; it also means they do not have to worry about deciding when the best time to invest is," she adds.

This can be helpful in volatile markets when the difference from one week to the next can have quite a considerable bearing on medium to long-term returns, says Gavin Haynes, investment director at Whitechurch Securities. "Even if someone has got a lump sum to invest, drip-feeding into the market can smooth out excessive short-term volatility."

Regular vs lump sum performance

£50 monthly savings      
Total sum invested £600 £3,000 £6,000
Average returns £576 £3,431 £9,106
Lump sum invested      
Total sum invested £600 £3,000 £6,000
Average returns £650 £3,491 £11,746

Buy low, sell high

"Whenever markets suffer a severe correction, you can be sure that commentators will extol the virtues of regular saving and the attractions of pound cost averaging," says Peter Walls, the manager of Unicorn Mastertrust.

"But the formula for successful investing is to buy low and sell high, or in the words of Warren Buffett, 'be fearful when others are greedy and greedy when others are fearful'."

AIC statistics show that when the markets are rough, regularly investing small amounts can be beneficial. In the last downturn (September 2007 to February 2009), a monthly investment of £50 into the average investment company would have lost 33%. The equivalent lump sum investment would have lost 44%.

Regular savers also benefited more quickly when the market rose. If they continued investing £50 per month until the end of 2009, that loss would have become a 9% gain. Lump sum investors would still be down by 16%.

But over the longer term, lump sum investors triumph. Over 10 years to the end of August 2013, a £50 monthly investment in the average investment company had grown to £9,106. The same amount (£6,000) invested as a lump sum over the same time frame almost doubled, to £11,746.

So if you are investing for the long term, can stomach volatility and have the money available, lump sum investing will give you bigger gains. But regular saving is also a valid investment style that helps protect capital during short-term bouts of volatility.

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