Three powerful reasons for regular Investing

Three powerful reasons for regular Investing

The two most powerful warriors are patience and time
— Leo Tolstoy

When it comes to investing we believe you should spread out your investment over time instead of investing one lump sum and...well, putting your feet up. As an example, if you are fortunate enough to have £12,000 to invest then we are suggesting you spread out how you invest it instead of investing the lump sum in one go. You could Invest £500 on a monthly basis.

Three powerful reasons for regular Investing

So why is this so important? We set out three reasons that makes the approach of regular investing so important.

Reason #1 - Helps minimise regret risk

Reason #2 - Disciplined approached to investing

Reason #3 - Seamless adjustment to your lifestyle

Let's go into a bit more detail.

Reason #1 - Helps minimise regret risk

It's virtually impossible to time markets consistently over the long term. However, some investors feel that they have a crystal ball and can predict best time to buy into an investment and also best time to sell. So from their perspective the best outcome is to buy the investment cheap and sell when the price has gone up, repeat this a few times and there’s your financial freedom ticket. It’s not this easy as the factors that affect investments are numerous and as such makes it so difficult to predict prices with certainty. So to avoid regretting your entry point into the market, the best thing is to buy bits of the investment on a regular basis which means some times you buy “cheap” and other times it’s “expensive”. If you keep repeating this process regularly then over time you smooth out your average cost of investing. 

A monthly investment can be viewed as regular enough for this purpose.  In the table below we illustrate the investment outcomes for a regular investor and one-off investor. Both invested £12,000 over the two year period from 2008 to 2009 which is one of the most volatile period in the last few decades. Both Investors were exposed to UK equities which is illustrated using the FTSE All Share Total Return Index.

Contribution Period

FTSE All Share Total Return

Regular Investment

Investment Growth

One Off Lump Sum

Jan 08

£500

£12,000

Feb 08

-6.3%

£500

£968

March 08

-1.8%

£500

£1,451

April 08

0.6%

£500

£1,959

May 08

3.4%

£500

£2,527

Jun 08

-0.1%

£500

£3,023

Jul 08

-9.4%

£500

£3,238

Aug 08

-2.0%

£500

£3,673

Sept 08

5.5%

£500

£4,375

Oct 08

-11.9%

£500

£4,355

Nov 08

-12.8%

£500

£4,296

Dec 08

-6.6%

£500

£4,513

Jan 09

9.1%

£500

£5,425

Nov 09

0.8%

£500

£12,567

Dec 09

4.3%

£500

£13,602

Total Invested

£12,000

Value at Dec 09

£13,870

£10,941

Value at Dec 12

£17,558

£13,851

At the end of the two year period to December 2009, the regular investor is better of with £13,870 whilst the one-off investor has £10,941 which is below the initial investment of both investors of £12,000. However, three years later at the end of December 2012 and assuming no more contribution after December 2009, both investors have more assets than they put into their investments illustrating that compounding and a longer time horizon usually helps grow your assets.

Reason #2 - Disciplined approached to investing

Once you adopt an approach of regularly investing then it almost becomes second nature. This usually leads to your emotions being taking out of the investment process and money goes into your selected investments regularly without the temptation to avoid certain periods or double up in other periods. Remember, no one has a crystal ball and timing when to invest in most cases lead to undesired outcomes.

Reason #3 - Seamless adjustment to your lifestyle

OK, maybe not seamless at the outset but regular investing helps you adjust your disposable income to do without money being invested. So if your plan to invest 10% of your disposable income regularly then in most cases you will quickly find out that you can actually live comfortably on the residual 90%. As such over the long term you have adjusted your spending and lifestyle to be more frugal whilst your investment grows for future projects.

MoneyNotes says

So what are you waiting for? Start now, start small, make it regular and leave it to accumulate over the long term. Good luck!

Still don’t know where to start? Try out our Money Chat to begin your journey.

Please note that past performance of Investments is not a guide to their future performance and that Investments generally do better than cash savings over the longer term, but Investments are volatile which means their value can rise and fall, so you have to be prepared to take on some risk.

 

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