Whether you are retiring this year, still working and trying to boost your savings or already retired and trying to achieve higher returns on your capital, with an uncertain outlook many wonder whether they should be investing as a lump sum or monthly.
This short article explores the options, so you can decide which method best suits you.
The first step is to establish how much you can, or should, invest.
Before considering the investment of a lump sum, you need to make sure you have enough cash in the bank. This should cover at least 3-6 months essential expenditure, or even more if you are self-employed.
You should also avoid investing any money you are going to need in the next five years. While investment values tend to follow an upwards trend, they do fluctuate in the short term. An investment period of less than five years means that you could lose money, as there is less time to smooth out volatility.
If you have more capital than you need for your immediate requirements, you may want to consider investing a lump sum.
If you are just starting to think about investing, monthly savings will probably be more suitable. You still need to make sure you are keeping enough cash aside, or building up an emergency fund as income allows.
A budget with your income and expenditure can help identify how much you can afford to invest each month. Starting to save regularly is a great way of building good financial habits.
Interest and Inflation
Despite recent hikes made by the Bank or England, interest rates are still near the lowest they have ever been. If you are receiving interest on your cash savings, the rate is likely to be poor and certainly losing value in real terms to inflation. There are still good reasons for holding some cash (for example, keeping an emergency fund), but holding large amounts of cash for long periods could leave you worse off financially.
The cost of living rises over time, often at an average rate of 2-3% per year. If you aren’t receiving this amount in interest, you are actually losing money in real terms, as your capital won’t have the same spending power.
If you want your money to keep pace with inflation, investing the money at the earliest opportunity will give you the best chance of this.
Timing the Market
Of course, it is difficult to know when to invest. The market goes up and down on a daily basis, and the news articles about the world economy can be exhausting to follow.
The holy grail of investing is buying low and selling high. The problem is when the market is down, people can be nervous about investing more money. When it is high, it is easy to believe the rising trend will continue.
There is no secret to buying at the right time. Statistics show that over the long term, prices do generally rise. Investing a lump sum successfully depends less on when you invest, and more on the assets you have selected and how long you hold them.
When saving monthly, you don’t really need to worry about market timing, as you are only investing relatively small amounts, and will capture both high and low points.
Pound Cost Averaging
Regular investments benefit from pound cost averaging. This means that you can gain from both high and low points in the market.
When prices go up, your existing investments increase in value. When prices go down, shares become cheaper, so you can buy more for your money.
In a consistently rising market, investing a lump sum will give you the best returns, as it has longer to grow. But real life doesn’t work like that. Even in a strong economy, the market fluctuates daily. Monthly investors are better placed to smooth out this volatility.
A compromise could be to invest your lump sum in stages, for example over six months or a year. This will give you some of the benefits of pound cost averaging, without keeping excessive amounts of cash for too long.
Whether you are investing a lump sum or a monthly amount, you will need to consider the risk level of your investment.
Investments vary in terms of risk, from cash (low risk and low return) to equities (high risk and high potential return). There is even variation within each asset class, as the shares of an established UK company are likely to behave differently from a start-up in an emerging market.
A younger investor with a 30 year career ahead of them can probably invest in riskier assets than a retired person who is relying on their capital to provide them with an income.
Rather than researching and trading shares on a daily basis, it is simpler, and usually more profitable, to invest in a diversified portfolio which holds a wide variety of different assets.
You do not need to have large amounts of capital to benefit from this. A multi-asset fund can provide all the diversification you need, at a reasonable cost and with low minimum contributions. Even if you are investing monthly, you can diversify your portfolio from day one.
It is often not a straightforward choice between monthly or lump sum investing. The best option will depend on:
- Whether your investment is coming from capital or income
- Your investment timescale
- The amount you have to invest
- How you feel about investments and risk, including how well you understand financial markets.
Monthly investing may be for you if:
- You are making regular savings from income
- You want to build discipline and good financial habits
- You don’t have a lump sum to invest
- You would prefer not to invest a large sum in one transaction
- You can invest for the long term
Investing a lump sum could be the best option if:
- You have surplus cash on deposit receiving a poor rate of interest
- You are a confident and experienced investor and can accept fluctuations in value.
- You are reliant on the fund to provide you with an income.
Please don’t hesitate to contact a member of the team using the short form below to find out more about your investment options.
The value of investments can go down as well as up and you might get back less than you have invested.
The content in this article was correct on 12/08/2023.
You should not rely on this article to make important financial decisions. Teachers Financial Planning offers independent financial advice on savings, pensions, investments, mortgages and mortgages for teachers and non-teachers. Please use the contact form below to arrange an informal chat with an adviser and see how we can help you.