Are you reluctant to make a lump sum investment in case the timing is wrong?
FTSE 100: 1 January 2017 – 31 October 2019
It’s been both a rollercoaster and a trip to nowhere for the FTSE 100 index in recent years. The fluctuations can be seen in the graph above showing the performance of the top 100 companies listed on the London Stock Exchange since 2017.
From 1 January 2017 to date, the index has moved in a band of about 1,300 points, but by 23 October 2019 it was at virtually the same level as it started. Busy going nowhere might be one description, although, importantly, that ignores the dividend income which the companies in the Index would have generated over the period. This boosted investors’ total returns over the period from 1.7% to 14.7%.
The combination of the market’s movements and political uncertainties have made some people reluctant to invest lump sums. “Now is not the time to buy,” has been an understandably tempting thought. However, to paraphrase one of America’s most famous fund managers Peter Lynch, more money has been lost by investors waiting for market falls than has been lost in the falls themselves. The hard truth is that anticipating market timing is virtually impossible.
One halfway house that is worth considering if you have a lump sum to invest, but still cannot bring yourself to commit it all at once, is phased investment. This involves investing capital systematically over a relatively short period. A typical approach might be to spread investment over 12 months, with equal amounts invested each month. Because you buy more when the price is low and vice versa, the mathematical result is that the average price of your investment is lower than the simple average of the prices at your 12 investment dates. The effect is known as pound-cost averaging and is mostly thought of in terms of regular savings plans rather than phased lump sum investments.
Many investment platforms will run the process automatically, transferring money from a cash account or cash funds to your chosen investment funds every month. However, the various platforms have differing rules, with some being more flexible than others. The easiest way to find the one most suited to your goals is to seek independent advice. No less than Warren Buffet has said “The stock market is a device to transfer money from the impatient to the patient.” If you’re prepared to be patient, you can harness your hesitancy to your advantage.