Establishing a regular savings plan using surplus income can be an extremely effective route to building wealth and achieving your financial goals over the medium to longer term.
There are a number of benefits to “drip-feeding” even modest sums into an investment portfolio each month via a direct debit, as outlined below.
First, regular contributions can help in achieving smoother returns and mitigate timing risk. Part and parcel of investing is the fact that investments go up and down in value. Investing after prices have fallen means buying into your portfolio at a lower level and bringing down the average price you have paid since the start of the investment. This is known as “pound-cost averaging” and through regular investing, the peaks and troughs will be ironed out or ‘smoothed’ over the longer term.
Second, market timing is extremely difficult and even investment professionals do not have a crystal ball and cannot predict, with any certainty, which direction markets will move in the short term. Regular investing helps take the guess work out of when to invest, as investments will be made automatically on a given date each month. Empirical evidence indicates that the average investor tends to follow the crowd – allowing the herding instinct to displace rational thinking – investing more when the markets rise and disinvesting when it falls; this can lead to inferior long term rewards.
Third, investing smaller sums on a regular basis could enable you to start investing sooner than if you were to wait for a lump sum to build up. This gives you more time to take advantage of the growth potential of compounding investment returns.
Fourth, you do not have to commit to a fixed amount each month; you can change the amount invested as required, to suit your circumstances. Even investing a relatively modest sum each month can lead to a significant pot over the long term, as shown in the following table, which assumes net investment returns of 4% per annum.
|Monthly Investment||10 Years||20 Years||30 Years|
Fifth, and finally, you will not forget to invest, as the investments are made automatically and you will come to view the contributions as part of your regular monthly spending. Indeed, after time, the regular debits will become of no consequence – and when that happens, it is possibly time to raise the ante!
When it comes to investing, we highly recommend that you seek financial advice and we are happy to discuss your requirements with you.
By Elliot Gothold, Consultant.