The Benefits of Investing on a Regular Basis
A common misconception around investing is the idea that you are supposed to only buy when the market is in decline and shares are cheap. This is known as ‘market timing’. In theory that is the ideal scenario, but there is one major flaw in that plan: it is impossible to predict the markets and, therefore, impossible to predict the best moment to buy. Just because the price of a share has fallen steeply, it doesn’t mean it has reached the bottom. Nobody can predict this, therefore, investing on a monthly basis takes all of the ‘guessing’ out of investing.We prefer to use a method called ‘pound cost averaging’. This involves investing a fixed amount on a regular basis. Take your monthly pension contributions, for example; share prices rarely stay the same for a long time. So, when you invest regularly, you end up buying more shares when prices fall (and vice versa).Additionally, investing on a regular basis can help you to become more disciplined. The regular contributions take the emotion out of investing. There is no room for you to worry about whether the price is low or high at the point of investing because your regular contribution feels like a normal part of your monthly outgoings rather than a significant lump sum investment.
What does this look like in practice?
Let’s say you begin saving at 25 years of age, with a target retirement age of 65. You decide to start saving 12% of your annual income of £40,000. At the current rate of tax, and assuming you have a Plan 2 student loan, you take home £2,394 per month. Your income grows by 3% per year. That makes a monthly contribution of £287.28 in the first year, rising by 3% each year until your retirement age of 65.In this hypothetical scenario, you would net more than £1.5 million by the time you retire, assuming a high savings rate. A steady stream of savings, coupled with decent investment returns and a 40-year period of compound interest, can turn a regular investor on a good salary into a millionaire by the time they retire.It is regular contributions over a sustained period of time that creates results, not ‘timing the market’ or getting lucky.
Want to learn more?
If you’d like to learn more about the benefits of regular investment contributions and how to invest your way to financial freedom, we highly recommend reading our book Invest Your Way to Financial Freedom: A simple guide to everything you need to know by Ben Carlson & Robin Powell, with foreword by Julian Gilbert.If you would like a copy, please get in touch with your CRM to request one – we’ll be happy to send one out to you!
