What Is Regular Saving and is it a Good Investment Strategy?
Investment success often comes down to timing but timing the market is pretty tricky. Even professional fund managers don’t always get it right – so what hope is there for individual investors?
The good news is, you can use a regular saving technique, sometimes called “pound cost averaging”, to remove the need to time your investments correctly.
What is regular saving?
Regular saving is basically drip-feeding your money into the market, rather than investing a lump sum in one go.
By saving a monthly amount into your investment portfolio you can ride out the highs and lows of the market. When share prices go up, the value of your stocks rise, and when they go down your next contribution buys more.
You can save up to £20,000 a year into an easyMoney innovative finance ISA. The “conservative” option only requires a minimum £100 investment and offers returns up to 4.05% per annum. The “balanced” option has an annualised target return of 7.28% and all lending is secured by UK property, giving you extra peace of mind. You can ask to withdraw your money at any time.
How does regular saving work?
Let’s say you decided to invest £1,000 a month. If the share price of your chosen stock is £50 in the first month, you can buy 20 shares. If the share price falls to £40 the next month, your £1,000 will buy 25 shares. This means you have 45 in total.
But if you’d invested your £2,000 all in one go all on day one, you’d just have 40 shares (£2,000 divided by the initial share price of £50).
In a volatile market, the average price per share can work out lower when you save regularly – in this case the price per share is £44.44 versus £50.
You might not win in a rising market
However, while regular investing can smooth the effects of downward movements in share prices, this strategy might not turn out to be such a winning strategy in a rising market.
For example, if you spent a lump sum £2,000 on shares costing £50 each, and the share price grew to £100 over the next month, you’d have shares worth a total of £4,000 (40 shares multiplied by £100).
But spending £1,000 per month would mean you’d have bought 20 shares at £50 in the first month but only 10 at £100 in the following month. This would give you a total of 30 shares worth £3,000.
Should you adopt a regular saving strategy?
Obviously, the investment strategy you opt for comes down to personal choice. If you don’t have a lump sum to invest, and are investing money from your income each month, you’ll be drip feeding money into your investments by default anyway.
But if you have a lump sum to invest, you’ll have to weigh up the risks of trying to time the market or investing money each month regardless of market conditions. For risk adverse investors, the latter may be the most prudent approach.
An alternative to investing in the stock market
easyMoney’s innovative finance ISA offers an alternative to buying stocks and shares. Instead your money is lent to property professionals and secured by UK property.
You can open an easyMoney account at easymoney.com or by calling 020 3858 7269. You can either start from scratch or transfer from other stocks and shares or cash ISAs. The minimum investment is £100. Remember, as with all investing, your capital is at risk. If you invest £1,000 or more you’ll receive an easyMoney Plus card for free offering some serious discounts at more than 100 of the UK’s biggest retailers