Establishing a regular savings plan out of surplus income could be an extremely effective way to help you build your wealth and achieve your financial goals over the medium to long term. As we are at the start of a new tax year, this is particularly relevant as funds can be invested in a Stocks and Shares ISA, whereby UK residents over the age of 18 have an allowance of £20,000 per tax year. Junior ISAs can be considered for children, where the allowance is £9,000. Any growth and income from such ISAs if free of tax and therefore can be very effective as a savings plan.
There are a number of benefits to “drip-feeding” even small sums of money into an investment portfolio such as an ISA each month via direct debit, as I will outline in this article.
Firstly, it can help to achieve smoother returns and balance out the 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 price 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.
Furthermore, 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. Therefore, regular investing helps take the guess work out of when to invest, as investments will be made automatically on a given date each month. In fact, the average investor tends to follow the herd and invest more when the market is rising and less when it is falling, which will lead to worse returns over the long term.
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.
You also do not have to commit to a fixed amount each month, and can change the amount invested if required to suit your circumstances. Even investing a relatively small amount 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|
Another benefit is the fact that you will not forget to invest as the investments are made automatically and you should view the investments as part of your regular monthly spending.
Finally, when investing a larger lump sum, you may be committing all of your money to the markets in one go. By “drip feeding” money into the market every month, if the stock market does fall, you have only invested some of your savings and therefore future payments benefit from the cheaper share prices.
When it comes to investing, we highly recommend that you seek financial advice and we are happy to discuss your requirements with you.
Please remember that past performance should not be seen as an indication of future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amount they originally invested and in some cases you may not get back anything at all.
Chartered Financial Planner