Four ways to invest in a growing population
Last month, the world’s population hit 8 billion*. The number of people on the planet has more than...
When it comes to putting money in a fund you have two choices: put in a lump sum or set up a direct debit to make regular investments.
Both have their pros and cons – but what route should you choose? How do you know which one will deliver the better long-term returns?
Here we examine both options, look at how each one works, and outline the factors you need to consider before making a final decision.
Let’s take lump sum investing first. As the name suggests, you put a substantial amount of money into an investment from the start.
Your money will go in the fund on day one at the unit price. This means you’ll have exposure to the asset straight away.
The positives include the fact you know exactly how much you’re paying out for the fund units, while your money is working on your behalf immediately.
Depending on the investment platform chosen, you may also qualify for a discount in exchange for investing a lump sum. However, that will very much depend on the provider.
In the same vein, investing in one lump sum means you’ll probably only pay one set of fees. If you drip feed, meanwhile, you could be faced with more charges.
Time in the market is also seen as beneficial, especially as most investment funds advise potential clients to have an investment time horizon of at least five years, preferably longer.
The downside to investing this way is that the value of your investment could fall – and when that happens to a big lump sum it can be uncomfortable, especially if it takes some time to recover its value.
So, how about regular investing? This involves drip feeding money into your investment fund on an ongoing basis, often every month.
This approach may suit those who aren’t in a position to invest a large sum immediately – or who wish to retain some control over their financial resources in case of emergency.
Regular investing removes the temptation to time the market: trying to buy when assets are low in price and then selling when they have risen significantly. The simple fact is that even financial experts find it impossible to get this right.
Investing a regular amount each month gets rid of this anxiety – and gives you the comfort of knowing if the asset falls in value, you can buy more units a cheaper level next month. This is called “pound cost averaging” – we’ll talk more about that later.
Setting up a direct debit also means investing goes into something akin to autopilot and removes the need for remembering to put money away.
Of course, the downside is that your money won’t have any chance of earning on your behalf if it’s stuck on the sidelines in a bank account offering meagre interest rate levels.
It’s even more potentially damaging if the level of interest being earned is less than the rate of inflation as it means the value of your cash is already falling.
Pound cost averaging occurs when investors pay a set amount each month to buy units of a fund – at whatever price they are currently available. This can result in substantial cost savings as you’ll take advantage of market movements.
For example, if you regularly invest £100 into a fund and have been buying units at £6 each, if they fall n to £4 you will get more units for your money. If they rise to £7 you will buy fewer units with your money but will be happier as they value of your investment has risen.
It all depends on your personal circumstances. If you’re in the fortunate position of having a lot of cash set aside, you may choose to invest the lump sum.
If, however, your resources are more limited, then regular saving may be preferable. It also means you’ll have spare cash to hand should you need it.
Your attitude to risk must also play a part in your decision-making.
If you’re not deterred by stock market volatility and are investing for the longer-term then you may be happy to commit a lump sum.
However, if you’re anxious about seeing the value of your investment fall – even if only temporarily due to market movements – then regular investing is a less gung-ho approach.
It’s impossible to say which one will deliver the best returns. It all depends on factors such as the market backdrop and the performance of your individual funds.
If you put in a lump sum, for example, and stock markets start soaring you will benefit from these increases immediately.
However, if you’d opted for the regular savings route, then you’ll obviously miss out on a percentage of these gains.
Of course, the opposite can happen. You could end up losing a substantial amount – on paper at least – if you invested a lump sum and there was a sudden stock market downturn.
In that scenario, the regular savings option would have protected you as less of your money will have been exposed to these falls.
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