Why there are benefits to making regular investments
PUBLISHED: 17:29 18 April 2019
Investments and movies can make you feel good, says Peter Sharkey
Unless he's visiting a client, one of the sharpest financial advisers I know rarely declines the offer of a post-work beer. We've known each other for more than 40 years, an almost incomprehensible period of time which, at the drop of a hat, can have us recalling, at length, the volume of water that has passed under our respective bridges.
As my old Mum used to wonder aloud, “where have all the years gone?” In this case, they've slipped by and last Thursday my mate and I were to be found in a pub drinking Guinness, discussing the previous night's game, complaining about this and that and generally sounding like a pair of old codgers. There were no pregnant pauses.
“What are you writing about next week?” he asked, nursing his second pint of the black stuff.
I'm pleased he keeps an eye on this column's content, but frankly, I tend not to think about future articles when I'm enjoying a drink. “Not sure yet,” I replied, honestly.
“Lump sum or drip-feeding an ISA. That's what you should cover,” he said, sounding like a forceful editor.
It transpires that one of the most frequently-asked questions heard by my pal is: 'Is it better to invest a lump sum in a stocks and shares ISA at the beginning of the year, or drip-feed the funds over the course of 12 months?'
Historically, stock market-facing investments, be it in shares or funds, tend to outperform cash over the longer term. It follows that the sooner you invest, the more time you have to generate a decent return.
While such a conclusion makes sense, it's also worth pointing out that if you invest a lump sum in one go, there is a risk its value could be affected should the stock market plummet immediately afterwards. Accordingly, drip-feeding money into your investment will minimise this risk, though you could also miss out should a share or fund go into overdrive and its value rocket.
Many moons ago, my financial adviser mate owned a small, independent cinema and to illustrate the pros and cons of the drip-feed or lump sum argument, we took a look at the share price performance of cinema giant Cineworld over the past 12 months.
Early last year, Cineworld's share price took a hammering after the company bought an American group, Regal Entertainment, taking on an enormous amount of debt in the process.
Let's say you had invested £10,000 in Cineworld shares after the price fell to 248p. Your investment would have bought 4,032 shares. As I write, the company's shares are trading at 312p, making the phantom £10,000 investment worth £12,570, a paper profit of 25.7pc which, you might imagine, proves the case for lump-sum investing.
Well, not quite.
You see, had you invested £10,000 in Cineworld shares six months later, in October 2018, when the share price had risen to 320p, its value today would be £9,750, a loss of 2.5pc.
Indeed, Cineworld's share price performance over the past year highlights the benefit of drip-feeding money into your investments as the chart below suggests.
Splitting your £10,000 into four tranches of £2,500 means you would have acquired 3,540 Cineworld shares over the period; today they're worth £11,044, a paper profit of 10.4pc.
Cineworld's share price performance (we could have chosen literally hundreds of other shares or funds) illustrates how difficult it is to 'time the market' and explains why so many people invest a set amount each month, comfortable in the knowledge that they're investing at an average price.
Furthermore, it means that investors who simply don't have the time or inclination to pore over the financial pages and familiarise themselves with the reasons for share price movements are not then stuck in front of a computer screen waiting to identify an opportunity to invest.
“Instead of worrying about how volatile fund x or share y is, most investors should ensure they make as much use of their annual ISA allowance as possible,” declared my mate. “Leave the hard work to investment professionals.”
“So, drip-feed or lump sum?” I asked as he headed for a Guinness refill.
“Oh, drip-feed. Every time.”
I couldn't agree more.
TAM Asset Management Ltd offer investors the opportunity to invest monthly in a variety of ISA portfolios during the current tax year and beyond from as little as £25 a month. For further details, please visit the MoneyMapp website.
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For more financial advice, check out Peter Sharkey's regular column, The Week In Numbers.
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