Your decision can have a big impact on your returns
Should you invest all of your money in one go or drip-feed it into the stock market over time? The answer will ultimately depend on whether you have a lump sum to invest or not, but it can have a big impact on your returns. Your decisions will invariably be based around your circumstances, attitude to risk and where you are investing your money and why.
If, for example, you’re comfortable with the risks and have strong conviction in your choices, you may want to invest a lump sum. However, if you don’t have a lump sum, or if you’re cautious about going all in, you might prefer to adopt a regular savings strategy.
Investing a lump sum
If you have, for example, £100,000 to invest and you invest all of it straight into the stock market, your capital has the greatest potential for growth, as it’s immediately fully exposed to the market. The assets in which you invest, be they shares, bonds or units in a fund such as a unit trust, are bought at the same price, and you can benefit from any price increases straight away.
The potential downside of investing a lump sum is that you’re exposed to potential downward movements in the market. So, if you invested all of your money in the FTSE 100 (the stock market index that tracks share performance of the top 100 companies in the UK), for example, and it dropped by 20%, your investment would follow suit. Staying invested in the stock market over a long period gives you the opportunity for your money to recover – but this could take a long time and would require a lot of nerve and patience on your part as an investor.
You also have to think about market timing – are you investing at a peak or at a low?
Regular savings and ‘pound cost averaging’
Regular savings offers the opportunity to make market fluctuations work in your favour. This approach is known as ‘pound cost averaging.’
Pound cost averaging describes the process of regularly investing the same amount, usually on a monthly basis, to smooth out the impact of the highs and lows of the price of your chosen investment.
The effect of pound cost averaging is that you’re buying assets at different prices on a regular basis, rather than buying at just one price. And while riding out the movements of the market, you could also end up better off than if you invested with a lump sum.