Is it better to save up and invest a lump sum or invest on a monthly basis? Saving regularly certainly has many benefits and often requires a different strategy to investing a lump sum.
There are various investment and saving products to choose from depending on your individual circumstances and reasons for investing. Some of these products make the ‘monthly vs lump sum’ decision for you.
You only need to look to the high street banks who offer high rates of interest but who will only allow you to invest monthly for a maximum of 12 months. Most ISA allowances, be it the stocks and shares element or cash, are fed monthly as opposed to a lump sum.
Why invest on a regular basis
There are many reasons why you would want to invest a certain amount of money on a regular basis.
You could be saving to pay for your children’s ongoing education costs or your own retirement. You could be investing your money to cover the costs of any future plans you have to upgrade your current home, buy a larger house or purchase a second home abroad.
On the other hand, you could be wanting to reduce the amount of tax you pay. Regularly investing in, for example, an ISA to not pay tax on the interest or growth, or contributing to your pension to gain invaluable tax relief is a highly tax efficient way of saving for the future.
Benefits of investing on a regular basis
A major dilemma faced by many investors is market timing. Diving in and out of markets on a regular basis requires constant monitoring and the ability to act swiftly. If you time it wrong and end up investing at a peak, you may find yourself slipping into the red quite quickly.
As the saying goes, it’s time IN the market that counts not TIMING the markets.
One of the key benefits of investing in a unit trust fund or investment trust scheme, such as an ISA or pension, on a regular basis is a technique called pound cost averaging. The aim is to lower the overall cost of the units purchased over time.
It means that more units are purchased when the prices are low, whilst fewer units are purchased when the prices are high. In so doing, the total average cost per unit of the investment is lowered. It also smooths out the risk in the long term.
It is possible to use this technique even when investing a lump sum by staging your investment into the market. This technique works well in a falling market but not so well in a rising market.
So which is better: investing monthly or in one lump sum?
As with all techniques there are advantages and disadvantages, and markets seldom work in one trajectory; they fall and rise. Benefiting from pound cost averaging by investing on a regular basis is liked by many as it spreads out the market timing and thereby removes some of the risk.
For many, investing monthly is the only option available. For others, a combination of regular contributions topped up at the end of the tax year by a lump sum (often after paying the tax bill!) works better.
Ultimately, whether you invest on a regular basis or a lump sum very much depends on many factors including your own cash flow, how much you are investing, what return on investment you are looking for, your age, overall financial portfolio and individual circumstances.
Remember, the value of investments can fall as well as rise whichever way you choose to contribute and you could get back less than you invest. We always recommend seeking independent advice to ensure that an investment is suitable for you.
Do you prefer to invest your money monthly or in a lump sum? Let us know by adding a comment below.