Investing monthly could help you become a better investor
Posted by Adrian Lowcock in Latest insights category on 09 Apr 20
One of the most difficult things to try to do when investing, although many still do, is to time the markets. It can be hard to put a lot of money into the market after it has fallen as this is usually when investors are most risk-averse and fearful. It is also very hard to sell investments when markets are at their peak, after all, how you know markets are at their peak?
Pound cost averaging
Putting a small amount away each month means you will be investing at different prices. Over the longer term, the benefit of this is that you’re spreading the risk, as some month’s you’ll buy when prices are high and other months when they are lower. This has an averaging effect on the price you pay for units and is called pound cost averaging.
Investing monthly can be a good habit to get into. It instills a discipline in your investment habits and also gives you the tools to take the emotion out of investing. Regular investing allows you to overcome your emotions as you remove the decision to invest a lump sum at a particular time and instead just drip feed a smaller amount each month. You don’t need to try and second guess the markets or overcome your fear when markets have fallen; monthly savings will put your money to work for you.
This allows you to focus on the future, rather than worrying whether today, tomorrow or next week might be a better time to invest.
You always make use of your ISA Allowance
The last two ISA seasons have been characterised by some uncertainly. The confusion over the Brexit deadline of the 31st
March 2019 meant people were nervous about the future last year, and this year with the UK in lockdown, it is understandable why individuals couldn’t or didn’t want to put a lump sum into their ISA
in one go. Since both events happened close to the end of the tax year it may have meant people missing out on using their ISA allowance altogether.
One solution to avoid this in the future is regular savings; you set up a direct debit for as little as £25 a month and decide where to invest. That way you’ll be sure to get to use some of your allowance, rather than miss out entirely.
Once set up, the money comes out of your bank account each month. It's then invested for you. You'll get used to the money leaving your bank account each month and it'll soon become part of your monthly spending.
Life is not predictable and your circumstances might change in the future which could have a significant impact on what you can afford to invest. You could see a drop in your income, have some unexpected bills to pay or end up with a little extra money to invest.
However, you have the flexibility to adjust your monthly contributions, raise or lower them to suit your needs. Also it is easy to change where you invest. You can choose from a wide selection of funds, investing across a variety of assets classes, and even spread your monthly savings across several funds.