The benefit of regular savings

May 15 2013 | Category: Money advice

In the world of investment, timing is everything. However, no matter how much hype we hear to the contrary, it is a fact that no one can predict what the market will do or when. This makes it difficult, not only deciding when to invest but also when to pull your valuable investments out of the market.

This is where the benefits of ‘pound cost averaging’ come into play – or in layman’s terms, regular savings. The theory is that by regularly putting smaller amounts of money into a fund or other investment, the risk of getting your timing wrong is reduced. Compared with investing an entire large lump sum in one go at a single price, the risk is mitigated by the fact your smaller sums will buy in at a variety of prices.

In a rising market, regular savings would underperform the growth of a single lump sum as the later investments would miss out on that rise in the early days. However, in an up-and-down or falling market, the opposite is true. Later investments would buy in at lower or alternating prices – some lower than the original price – and would therefore gain a little more when the market finally did rise.

Similarly, regular saving is a great way to build up a lump sum from zero. A lump sum of £5,000 can seem a tall order for some people. However, putting aside £100 a month from your income is less of an issue – and with investment growth or interest added you can quickly build up a reasonable amount without really noticing. The longer you leave it, the more impressive that growing amount potentially becomes.

Most investment products offer regular savings as an option, including investment funds, ISAs, life assurance and pension plans. If you are considering investing for the first time, this is also an ideal way to start as the small amount you miss every month has less impact on your lifestyle and you will be less sensitive to the short-term ups and downs of markets as falling prices give you the chance to buy the same investment at lower prices.