Regular investing can also be an ideal way for parents or grandparents to save money for children. By investing regularly while children are growing up, it’s possible to accrue a healthy lump sum. This can then be used to cover university fees, a deposit for their first property or an adventure, such as world travel or starting their own business.
Here are five more reasons regular investing can be a sensible option if you want to grow your wealth.
1. Builds discipline
Investing regularly helps you build good habits and keeps you committed to a long-term investment strategy. Ultimately, if you commit to regular saving, it doesn’t take long before you start to build up a sizeable pot.
With investments, typically, the longer you leave your money invested, the greater the potential rewards. Over time, your regular investment should build up, no matter how little you might save each month.
A good approach is to invest a fixed portion of your income each month. This way, as your income fluctuates over your working life, you can adjust the amount you’re saving in line with the amount of money you are making to build up a future nest egg.
2. Benefit from compound growth
Compound growth is the most powerful and underrated benefit of long-term investment.
Compound growth has its largest impact during the latter stages of your investment journey. For example, 10% growth on £1,000 is only £100, but 10% growth on £1 million is £100,000. So starting early and setting good habits is vitally important if you want to reap the full rewards of compound growth.
Even if the amount of money you’re investing each month may seem small, every little counts and will ultimately make a big difference later down the line.
Einstein is reported to have said compounding was the eighth wonder of the world, yet few people understand how powerful it is. This is still true to this day.
To illustrate the power of compounding, if you invested £500 a month from your 16th birthday to your 21st in a fund that delivered 5% a year, and made no other contributions for the rest of your life, by your 60th birthday you’d have almost £300,000 (The Calculator Site).
3. Bounce back faster after market dips
If markets fall, investing at regular intervals means your money will buy more stocks or shares when their prices are low. Likewise, you’ll buy fewer stocks or shares if you invest when markets are high. This means that the percentage decline in the value of your investment is also lower when markets fall. This is commonly referred to as pound cost averaging as it helps to eliminate the impact of volatile markets as over term you end up buying the average market price.
However, if you’d invested sizeable sums irregularly, and the market declined, you might have placed all of your money into markets at a high price. This, in turn, would mean you’d see a significantly larger decline in value.
4. Pick up potential bargains
When stock market prices start to fall, many people panic and tend to avoid investing at that point in time. Investors who get spooked by market changes may pull their money out of the market or refuse to enter the market until things settle down.
However, because fear drives prices artificially low, this is often the best time to buy into the market. At times like these, adding to your investment means that you may enjoy larger returns when the markets rally.
Many people find it difficult to remove emotion from investing and so struggle to benefit from market downturns.
For example, if you go shopping in the January sales and find a jumper that you really like for a 50% discount, you’d think that’s a great deal. However, if someone offers to buy into a company after it had fallen by 50%, your first reaction is likely to question why it has fallen and should I be avoiding investment.
Most of the time, a company does not become a bad company overnight, but wider market news may have caused the stock price to move considerably lower. Like the jumper, the company is now at a discount.
Regular saving removes the emotion from investing.
The table below shows how a regular £1,000 investment every month during 2018 compared with a £12,000 lump sum invested at the beginning of the year. In both cases, dividends are reinvested and don’t take fees into account.
Source: Bloomberg
5. Avoid temptation to “time” the market
Some people will agonise over when they should invest their money in the stock market, hoping to find the ideal time to buy. This approach is incredibly difficult and, as we all know, there’s rarely such a thing as “perfect”. Even the most seasoned of investors would be queuing up for a crystal ball if there was one.
With this in mind, professional investors and money managers with large sums to invest will drip feed their funds into the market over time (usually over the course of a few months, depending on the circumstances). As the strategy of seasoned professionals, it’s a great approach for novice investors.
Instead of trying to buy and sell at the right time, regular investing means you remain fully invested. As an illustration of how beneficial this can be, the chart below shows the impact of missing the best days in the market:
A £100,000 investment in developed markets equities from January 2005 to January 2020
Source: Bloomberg, MSCI Daily Total Return Gross World Index
Missing the top 20 days over 15 years reduced the end investment value by more than £250,000, from £443,014 to £188,941.
Get in touch
Regular investing is a powerful discipline that you can use to build your wealth. The sooner you start, the better. Invest this way and, with time on your side, you’ll be well-positioned to ride out any short-term volatility and you can avoid the problems of attempting to time the market.
To find out more about how we can help you invest your money wisely and how you can profit from expert insight and long-term growth, email enquiries@bowmoream.com or call us on 0203 617 9206.
Bowmore Asset Management Ltd is authorised and regulated by the FCA.
The value of your investments can go down as well as up, so you could get back less than you invested.
Past performance is not a guide to future performance.
