In this guide, we take a look at the pros and cons of drip-feeding versus lump-sum investing.
Buy low and sell high is said to be the secret to successful investing, but with even the most experienced of investors struggling to predict market movements, it’s a strategy that is fraught with risks.
The difficulty is there is no real way of figuring out how low is low and how high is high. All too often, investors buy investments only to see them plummet in value; or sell them just before they bounce back.
One way of removing the anxiety around market timing is to use a strategy called drip-feed investing. Instead of investing a lump sum of money all at once, you commit to investing a set amount each month.
“By adopting this approach you remove your built-in biases and assumptions automatically and dispassionately, and so are less likely to try and predict how markets will behave,”
Says Ed Monk, associate director for Personal Investing at Fidelity International.
In addition to taking the emotion out of investing, drip-feeding enables you to average out the price you pay for your investments – a concept called pound-cost averaging. When prices are down you buy more units in your investments and when prices are up you buy fewer.
“History clearly shows that the over long term, markets steadily increase but with down periods in between,” says Andy Parsons, head of investments and product proposition at The Share Centre. “Providing you’re investing for the medium to long term, ideally more than five to seven years, then such an approach should provide a financial reward.”
Lump-sum regular investments vs drip-feed investing
The main benefit of lump sum investing is if share prices are going up you can take full advantage of market growth. On the flipside, your entire lump sum is exposed to a potential drop in the market, whereas with drip-feed investing only a small proportion of your money falls in value. Deciding between the two strategies will usually come down to your tolerance for risk.
Several pieces of research suggest lump sum investing wins in a bull market, whereas drip-feeding is likely to be the better option in uncertain times. A research paper by Michael S. Rozeff at the University at Buffalo asserts that investors who hesitate lose. His study reveals that a lump sum investment in the S&P 500 made at the beginning of each of the years 1926 to 1990 had an annual return that was higher than a monthly drip-feeding strategy in 40 of the 65 years.
Likewise, a column by Tim Harford in the FT argues that since drip-feeding has only done better than lump sum investing when the market subsequently fell, lump sum investing is a better bet because markets rise more often than they fall. However, he concedes that markets fluctuate a lot, which can result in lump sum investors making simple errors like selling at the bottom.
The beauty of drip-feeding is there is no need to try to time the market – and this removes the potential for costly mistakes. Analysis from Fidelity suggests impartial investing is more likely to beat a market timing strategy over the long run.
Its research shows if an investor invested regularly in the FTSE All Share between 1990 and 2020 – putting away £1,000 a year in the first decade and then increasing this by £1,000 in each subsequent decade – their original £60,000 would increase to £166,776. In contrast, if an investor set aside the same amount each year but only invested when the market hit a cyclical peak they would end up with £114,767. Even if an investor managed to invest these same amounts when the market was at its lowest, they would grow their pot to just £144,215.
How to set up a regular investment
Setting up a regular investment through a platform like Hargreaves Lansdown or AJ Bell Youinvest is fairly straightforward. It’s just a matter of opening an account, choosing an investment and selecting the regular investment option. You can compare stockbrokers for regular or lump sum investments here.
One thing to be aware of is fees. Most platforms charge a fee per deal, although regular investment dealing charges are usually £1.50 versus around £10 for a standard investment. The minimum amount you can invest is typically £25 or £50, but it’s worth bearing in mind that investing very small amounts can be inefficient because of the charges involved.
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