“What a difference a day makes” is a line from a classic song written by a Mexican lady called Maria Grever in 1894, long forgotten alas but the sentiment behind the lyric is so very telling when looking at the current investment arena and recent market history.
The watchword over recent months and years since the financial crisis of 2008 has been “volatility” and we had better all get used to it because it is here to stay. I heard somebody the other day refer to modern day market price graphs as “ripsaws”, jagged and sharp.
Prior to the global economic meltdown of 2008, fluctuations in market share price values and the price of units in collective investments, while constantly in flux upwards and downwards, were invariably within levels that did not necessarily trigger next day news headlines of unconstrained euphoria or gloom and doom.
Investors looking to get into the market were taking a calculated risk based upon their own research or advice received and looking for capital growth and/or income. For those with the capital available, the choice was and indeed is still today one of lump sum at a stroke or drip-feeding their investment over a period of weeks or months.
Recent research from the Association of Investment Companies (AIC) has thrown some very interesting numbers up on the comparative performance of lump sum investment versus regular monthly investment strategies.
In essence, the AIC states that a £50 per month equity-based investment since September 2007 would have grown to £7,905 as of end of April 2016. In direct contrast, an equivalent lump sum investment of £5,000 over the same time frame would be worth £8,031, some 1.6 per cent greater.
Push the time frame back further, from end of February 2000 to April 2016 and the outperformance in final value of similar lump sum option versus regular monthly investment is £26,657 against £21,741 – an uplift of some 23 per cent. On first impression the choice of lump sum over regular monthly investment may well appear a no-brainer, but my view is that it is not quite as simple as that.
When making the decision, potential investors should consider other factors:
• Is the capital I am going to use for a lump sum investment absolutely free of the likelihood that it may need to be accessed in the short term?
• Is my disposable income likely to increase in the short to medium term, thus making more monthly investment available?
• Is my tax position likely to change in the short to medium term and might this influence my investment profile and how I invest?
• Am I confident and clear on my understanding of and appetite for investment risk right now, before committing a lump sum investment or should I hedge my bets in the short term by drip feeding into the market and taking advantage of potentially lower prices?
• Am I sufficiently in possession of research that supports my lump sum investment choice today or should I keep things flexible and open to adjustment in the coming months and years?
Hindsight is a brilliant facility but you only get the benefits of it after the investment has taken place.
Nick McBreen is an Independent Financial Adviser at Worldwide Financial Planning
