Money

There are many different ways to invest in the stockmarket.  Perhaps the most accessible way is through a regular savings scheme. Putting a little aside each month can soon add up to a sizeable pot of money, which would come in handy for supplementing times such as retirement or saving for children when finances are likely to be stretched.

One of the advantages of regular saving, as opposed to investing a lump sum, is that it can produce better returns during volatile market conditions. The financial crash of 2008 knocked investor confidence and some people may feel more comfortable drip-feeding their money into the market rather than investing their savings in one go. In fact, recent research from the Association of Investment Companies (AIC) examining regular saving versus lump sum investment during cautious or ‘bear’ market conditions found that this view was justified.

In the last bear market (30 September 2007 to 28 February 2009) a regular investment of £50 per month into the average investment company would have seen a 33% loss in share price total return terms. However, the equivalent lump sum investment would have lost 44% - some 10% more. Crucially, if regular investors had continued investing £50 per month to the end of 2009, thereby benefiting from the rally in markets in the second half of that year, regular investors’ losses would have turned into a 9% gain, whereas lump sum investors who stayed in the market until the end of December 2009 would still be nursing a 16% loss.

Monthly investments

One of the reasons for this is that regular investing each month gives you a lower risk profile by helping to smooth out some of the stomach churning highs and lows in the price of shares. Known as ‘pound cost averaging’, it means investors buy less shares when prices are high and more when prices are low and do not have to worry about deciding when the best time to invest is. However, over the longer-term, lump sum investing has outperformed regular investing because investors’ money has been invested for longer, benefiting from the stock market’s gains. Indeed over 10 years, a £50 per month investment in the average investment company to the end of June has grown to £10,057, whereas the same amount invested as a lump sum (£6,000) over the same time frame has almost doubled, to £11,855.

If you do decide to take advantage of the benefits of regular saving, then you may want to do so through a wrapper product, such as a savings scheme or an ISA. The latter will exempt you from paying income or capital gains tax on your investment and is an additional way to make your money work harder. Many investment company ISAs or savings schemes can be accessed with relatively modest sums; some as little as £20 a month. Up to date details of investment company saving schemes and ISAs can be viewed in the statistics section of the AIC’s website, along with details of how to invest.

Annabel Brodie-Smith

About the author

Annabel Brodie-Smith is Communications Director at the Association of Investment Companies (AIC).

www.theaic.co.uk