Investors need to invest in lump sums if they want to outperform over the long-term, according to David Carroll, head of investment strategy at Seven Investment Management.
Contrary to conventional wisdom, Mr Carroll says that investors who are willing to be patient will have more success if they commit a lump sum rather than small, regular amounts.
Drip-feeding money into the stock market is frequently touted as the most effective way of investing. It mitigates the risk of investing as the market peaks, and means investors can benefit from pound-cost averaging, whereby you buy fewer units or shares when they are expensive and more when they are cheap.
But Mr Carroll says that for those who are prepared to ride out the highs and lows, a lump sum has longer to work harder.
A £10,000 sum invested into the 7IM Balanced fund 10 years ago would have grown by 59 per cent.
Meanwhile, if you had invested £83 a month into the fund over the past decade you would generated a return of 40 per cent.
But while the lump sum investment would have returned more over the period, investors would have had a rough ride – their money would have been in negative territory until the end of 2009 – while regular investors would have been on a steady upward trajectory.
The same can be seen with an investment into the stock market.
Figures from Hargreaves Lansdown show that £10,000 invested into the FTSE All Share 20 years ago would now be worth £35,027. If you had invested £500 a year over that period you would have just £21,063.
Alistair Cunningham, chartered financial planner at Wingate Financial Planning said: “You don’t drip-feed investments to get superior returns, you do it for peace of mind.
“If you are sure markets are going to go up then of course it makes sense to have your money invested for as long a period as possible. But markets are uncertain and drip-feeding helps avoid the pain of seeing the value of your investments fall.”
