An investing strategy well-suited to volatile market conditions

The argument for investing identical amounts regularly over time is particularly compelling when stock markets hit a rough patch. Graeme Evans explains why.

It is notoriously difficult to time investments, with the danger things could backfire spectacularly where a lump sum is involved. A better bet for many is to space the investment out over time, known as pound-cost averaging.

The argument for regular investing is particularly strong in present market conditions. By investing the same amount of money each month, the saver irons out volatility and stands to benefit when the share price rises.

But what happens if markets rally? Regular investors will potentially have missed out on growth compared with those who invested a lump sum. Their money is in the market for longer, while investing as early as possible also means it is exposed to a market upside for longer.

Research by interactive investor shows that investing a lump sum early has proved beneficial for ISA investors. It found that over the past 20 years, from 6 April 1999 to 5 April 2019, investors who paid in the full amount to their ISA each year would have invested a total of £206,560.

Over that period – achieving the FTSE All Share total return, excluding charges – early-bird investors would have a portfolio worth £387,629. Regular investors would be sitting on £380,979, while last-minute investors would have £369,812.

• Regular investing with interactive investor

The beauty of regular investing is that it forces you to invest regardless of what the market is doing. As well as this disciplined approach, it also removes much of the stress and worry out of building a long-term portfolio.

Lump-sum investors, in contrast, tend to take a more impulsive, market-timing approach that can be counter-productive. There is a danger they become over-fixated by sentiment and try to buy when they think the market is at its lowest and sell when it is at its highest. This is a skill not even the most experienced fund manager can perfect.

Independent investment expert Rebecca O’Keeffe says: “The evidence shows that the longer you spend invested in the stock market, the better off you are likely to be – but it doesn’t consider the ‘sleepless nights’ factor.

“While investing regularly may be slightly less effective than investing a lump sum, it comes with one huge benefit – no regret risk. Investing every month in a disciplined way removes the worry about trying to time the market and should allow you to sleep better at night.”

It is worth remembering the advice of Berkshire Hathaway chairman Warren Buffett, who prefers not to have an opinion about markets in case it distracts from making good stock purchases. He says: “We continue to make more money when snoring than when active.”