Over longer time periods the common belief is that lump sum investing outperforms regular investing because lump sum investments have more money working from day one. The market is currently significantly down on its April 2015 all-time high – of course it is impossible to know if this is a buying opportunity- but let’s take a look at a worst case example of market timing, investing via a lump sum and regular investing prior to the credit crunch.
On 15 October 2007, the FTSE 100 reached 6751.7 but then the credit crunch began, and it reached a low of 3,512 on 3 March 2009.
A regular investment of £50 per month in the average investment company from the end of September 2007, prior to the credit crunch (a total of £5,000) would have grown to £7,905 (at the end April 2016). An equivalent lump sum investment of £5,000 in the average investment company over the same time frame would now be worth £8,031. Admittedly, there is not much difference between the two types of investing but in a worst case scenario, investing when markets were near their high, lump sum-investing outperformed regular investing to the end of April 2016.
So let us take a look at another tough scenario, investing via lump sum versus regular investments when the FTSE 100 was close to its 1999 high prior to the tech bubble bursting and the market declining.
A lump sum investment of £9,550, admittedly a bizarre amount, in the average investment company at the end of February 2000 prior to the tech crash would now be worth £26,657 (end April 2016). While a £50 regular investment (equivalent amount) in the average investment company at the end of February 2000 would be worth £21,741 (end April 2016). Over a longer time period the lump sum figures are much more convincing than regular investments as more money is working from the start.
We have looked at the worst case examples, so how about if we compare both ways of investing over some more conventional time periods. With the volatile markets we have seen recently, over the last year you would expect to see regular investing outperforming lump-sum investing. And you would be correct, although the lump sum investment in the average investment company has outperformed regular investing over every other time period. Over one year the difference is only £15, with a lump sum investment of £600 falling to £590 at the end of April versus a £50 a month investment worth £605 – marginally up, despite the difficult markets, and illustrating the benefits of pound cost averaging. Over five years a lump sum investment of £3,000 is now worth £4,174, whereas the equivalent regular investment is worth £3,645.
However, as the time periods get longer the differences between the two types of investing become more pronounced. Over ten years a lump sum investment of £6,000 is worth £10,746 versus £9,565 for regular saving. Over 20 years the difference between the two types of investing is an eye-watering £22,519.
Regular investments (total invested £12,000) amounted to £31,148 now, versus a lump sum investment of £12,000 worth £53,666. Clearly lump sums outperform regular saving more convincingly over long time periods but as Warren Buffett said: “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” For long-term investors the only time it definitely makes sense to invest via regular savings is when you do not have a lump sum to invest.
Annabel Brodie-Smith is communications director of the Association of Investment Companies
