Taking the stress out of investing

It’s been an exciting couple of months in global stock markets – if cliff jumping or taking on the world’s largest water slides are your entertainment of choice.

If you’re not so keen on feeling like your stomach is in your mouth, then you would be forgiven for replacing the word ‘exciting’ with ‘worrying’: it’s never nice to see your investments fall in value.

At the time of writing, the UK stock market, has experienced its worst fall since 1987 and is currently down almost 29%* year to date.

No one knows if this is the ‘bottom’ or if markets will fall further, and this makes it very difficult for investors.

But rather than umming and ahhing and trying to second guess the direction of stock markets, taking a 'little but often' approach could be a less stressful solution: instead of investing a lump sum, you could invest smaller amounts each month.

What’s more, it’s easy to set up or amend monthly savings. You can start them online or over the phone with our client service team (020 7384 7300).

Monthly investing already paying off in 2020

Already in 2020 – just three months in – regular investments have been the most successful strategy.

£4,000 invested in the average UK fund on 1st January 2020 would be worth £2,764.19 today. Had that investment been spread out, with £1,000 invested on the first of each month, an investor would be more than £235 better off, with a pot of money worth £2,999.53.

The same amount invested in LF Lindsell Train UK Equity, the best performing UK All Companies Chelsea Core Selection fund so far this year, would be worth £3,188.14. A monthly investment in the same fund would be worth £3,457.69 – some £269.55 more.

Chelsea Core Selection funds: regular vs lump sum investments in 2020

Chelsea Core Selection fund name £4,000 lump sum today £1,000 per month today Difference
LF Lindsell Train UK Equity £3,188.14 £3,457.69 +£269.55
Liontrust Special Situations £3,091.74 £3,248.96 +£177.66
Marlborough Multi Cap Growth £2,949.72 £3,193.85 +£244.13
Schroder Recovery £2,490.43 £2,822.22 +£331.79
JOHCM UK Dynamic £2,469.21 £2,760.71 +£291.50

Advantages of regular monthly savings

While monthly savings won’t bounce as much in a speedy recovery, as the data above shows, there are a number of potential benefits they do offer:

  • Firstly, monthly savings remove 'timing' considerations from your investment decisions. Very few investors can successfully predict the direction of the market in the short-term, and getting it wrong can be costly, so why try? 
  • Secondly, regular savings also provide us with peace of mind: we can sleep at night, knowing that we are investing smaller amounts on a regular basis and that the fluctuations in the value of our portfolio will be less pronounced. Once you've set up your direct debit, you can sit back and relax for the rest of the tax year. 
  • Thirdly, you benefit from 'pound cost averaging': when we invest the same amount on a regular basis, we simply buy more when an investment is cheaper and less when it is more expensive. For example, a £100 investment into a fund with a share price of £5 could provide you with 20 units during the first month. Say the share price fell in month two, your £100 now buys 25 units at a price of £4. In total, you have 45 units at an average price of £4.44.
  • Finally, you can invest as little as £1 per month, or as much as £1,667 per month into your ISA and it can be taken directly out of your bank account. This means it can become one of your regular monthly outgoings - only instead of paying a bill, you are saving towards your future.

*Source: FE Analytics, total returns in sterling for the FTSE All Share, and funds in the IA UK All Companies sector,1 January 2020 to 6 April 2020

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.

Published on 07/04/2020