A simple but effective way to invest

Investing regularly can help counter stock market volatility and build a substantial nest egg over time.

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  1. Rob Morgan

While many people leave their ISA contributions until the end of the tax year, it is often better to use the allowance early. That way your chosen investments are sheltered from tax immediately and have longer to produce income and growth – though it is also possible it could work against you should they fall in value over the course of the tax year.

If you don’t have a large lump sum to put in one go, or you feel nervous about markets in the shorter term, there is an alternative: regular savings. Charles Stanley Direct you can contribute smaller amounts to our Stocks and Shares ISA as and when you like, or set up regular savings from your bank account.

For the 2019/20 tax year the ISA allowance is £20,000, to be allocated as you wish between a Cash ISA and a Stocks and Shares ISA (plus other options, a Lifetime ISA – if you are eligible – and an Innovative Finance ISA). Charles Stanley Direct only offers a Stocks and Shares ISA for investments.

Almost anyone has the potential to build a sizeable sum over time by investing small amounts regularly. The important thing is getting started, and the earlier you do the more time your chosen investments have to grow – and time can be an exceptionally powerful ally.

 

Time on your side

Take two investors, both investing for retirement in 40 years' time. One starts investing £100 per month right away, the other does nothing for 20 years, but then invests £300 per month. The investments chosen both grow by 5% per year after charges. At retirement the first investor will have spent £48,000 on their monthly contributions and the second investor £72,000. Yet despite having spent much less, the first investor's retirement pot would be worth £148,252 compared to the second investor's £121,741.

Even if you don't have a multi-decade time horizon it's still possible to build up a significant sum by saving regularly. In addition, regular savings are flexible, so you can stop and start them as you wish or change the amount. You can also change where you invest to suit your views and the level of risk you want to take.

 

Counter volatility

By investing a given amount in a fund regularly you end up buying at different prices. Dips in the market, particularly in the early years, could even work to your advantage.

For example, if you invest £100 every month into a unit trust fund, the cost of the units for each purchase will depend on how the assets in the fund have performed. For example, if in month one the units cost 50p each you would get 200 units for £100 invested. If in the second month they are 54p each you would get 185 units for the same amount of money, but if they dip to 40p you would get 250 units. 

By investing monthly in chunks, rather than a larger lump sum in one go, an investor ends up buying more shares or units when prices become cheaper and fewer when they become more expensive. This can be a great way to invest because if you keep buying the market falls you could, over time, turn volatility to your advantage. This effect is known as 'pound cost averaging', and over longer periods it can help smooth out the highs and lows of the market; though there are still risks and with all investments you could get back less than you put in.

Another important aspect of committing to regular savings is that it takes away the decision making about when to invest. It removes concerns about timing the market, whether it’s expensive or about to fall, and enforces a healthy discipline of investing at all times – good and bad. If the market falls, you can ignore it in the knowledge you have committed to investing for a long period and your chosen investment has become cheaper to accumulate.

 

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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Investment involves risk. You may get back less than invested.