Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, as part of Morningstar's Guide to ISAs, Pensions and Tax-efficient investing Tom Stevenson, investment director for Personal Investing at Fidelity International explains the effectiveness of drip feeding your investments.
Drip feeding your investments into the markets could help you achieve significantly better returns than when trying to time the markets. Our analysis looks at three hypothetical investors – ‘Steady Eddie’, ‘Bad Timing Bob’ and ‘Good Timing Gary’. The analysis shows that Steady Eddie, who began investing regularly in the FTSE All Share in 1986, putting in £1,000 a year during that decade and bumping up his annual investments by £1000 each decade until January 2016, would have seen his original investment of £82,000 grow to £233,800.
On the other hand, Bad Timing Bob, who only invests in the FTSE All Share at the top of the market, is left with nearly half as much. Like Eddie, Bob saves £1,000 a year, upping his annual savings by £1000 each decade, but unlike Eddie, he invested the money he saved in the FTSE All Share just before market downturns. As a result, Bob’s original investment of £82,000 would be worth £120,970.94. While this is an increase of 148% it is nearly £113,000 less than Steady Eddie.
Getting the Timing Right Fails to Profit
Even Good Timing Gary, who only ever invests in the FTSE All Share when the market is at its lowest, is unable to match Steady Eddie. Just like Eddie and Bob, Gary sets aside £1000 a year, increasing his annual savings by £1000 each decade. Even in the nigh on impossible scenarios where he successfully times the market, Gary’s original investment would have returned £188,893.13 – nearly £45,000 less than Steady Eddie.
What Can We Learn from Markets?
Bob, Eddie and Gary teach us some important lessons about investing. The first is obvious – good timing is better than bad. Unfortunately, we know that consistently effective market timing is nigh on impossible.
The second, and more useful, lesson is that time in the market is better than timing the market. Over long periods, stock markets have tended to rise and that means that putting your money to work in the market and keeping it there has generated better returns even than those achieved by the best market timer. Even if you can pick your moments with skill, leaving your money idle while you wait for the right time to invest can seriously compromise your long-term returns.
Our analysis shows that the most sensible approach is to stay invested and to drip feed your savings into the market month after month. By investing regularly like this you benefit from a process known as pound-cost averaging – you buy more shares when prices are low and fewer when they are high. As importantly, you allow the wonderful power of compounding to work its magic on your savings for the maximum available time.
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