Coronavirus - should I be investing and how best to do it?


Mark McKenzie

Mark McKenzie

Financial Planner


The answer to the first part of this question will depend upon your individual circumstances and you should discuss any investment plans with your financial planner.  

Following discussions with your financial planner, you have decided to invest some of your money in order to achieve long term growth. 

At this stage one question we are often asked is – “Should I invest it all as a lump sum or invest it at regular intervals?”  

Lump sum vs. drip? 

Investing a lump sum will mean that all of your capital will buy your chosen investment(s) at one time. In the current environment this might not seem to bad an idea, with the majority of markets lower in comparison to where they were at the start of 2020. By investing as a lump sum now you will hopefully benefit in the long term when the markets start to recover. 

As well as share price growth, investors benefit from dividends paid out by the underlying companies that you are invested in. The quicker you invest and the more you invest, the more you’re likely to benefit from the magic that is compounding. 

On the downside, lump-sum investing can feel risky. Maybe the markets will fall further as soon as you invest the lump sum? 

Drip-feed investing (or ‘pound-cost averaging’) neatly avoids this. By regularly investing the same amount every month, you’ll buy some investments when prices are high and some when prices are low, thus smoothing out your returns over time.  

A drawback of this approach, of course, is that no one knows where markets are going next. So, while drip-feeding works wonders in a falling market, the opposite will leave you with far less investment than if you’d gone ‘all-in’ from the off. 

Another potential issue to the drip-feed approach is that it can be hard to decide exactly how much you should invest every month when you’re working with a lump sum. To complicate matters, the longer this money stays in your cash account, the more likely its value will be eroded by inflation. 

 

So Lump sum or drip feed? 

A study by Vanguard in 2016 found, lump-sum investing generates better returns than its drip-feed counterpart roughly two-thirds of the time. 

While Vanguard’s research suggests that lump-sum investing generates slightly superior returns more often, this doesn’t automatically make doing it any easier. 

If investing everything all at once will keep you awake at night, then the potential for slightly lower returns through the drip-feed approach might be a price worth paying.  

That said, Vanguard does recommend moving money into the market over no more than one year, so that you aren’t in cash for too long.  

As mentioned at the outset, everyone’s personal circumstances are different, whatever your concerns or issues may be, please feel free to contact your financial planner as we are always here to listen and help. 

  

Please note: This communication should not be read as a financial advice. Past performance is not a guide to future performance. While all possible care is taken in the completion of this blog, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained herein can be accepted by this firm.