“Investors often sell prematurely and miss out on significant market gains,” said Gabby Byron of MGIM.
Panic selling is similarly risky. That's because if investors sell during an economic downturn, they could miss out on significant profits when the market eventually recovers.
“One of the best days of 2020 came right after the worst, highlighting the importance of resilience and patience in navigating market turbulence,” Byron said. “Tolerating market noise and volatility is often the price you pay for long-term gains.”
Lump-sum investment and regular investment
Some investors, perhaps after receiving an inheritance, will be in a position to access large sums of investment capital. The question for these investors is whether they should invest their money all at once, or feed the market in small increments over time, also known as pound-cost averaging.
James Norton of asset management firm Vanguard says of the latter approach: “What often tempts investors to use this technique is the fact that pound-cost averaging can provide some protection against the possibility of a market crash shortly after the funds are invested.” No one wants to accidentally buy at the top of the market.
“This means that instead of the entire investment suffering this loss, only the small portion invested will suffer a loss. And in theory, the rest will be invested at a lower price. In this way So, if the market is falling, pound-cost averaging may work well.”
However, in most cases, pound cost averaging will lead to lower returns. Vanguard says that after one year his $100,000 (£79,238) investment in his 60/40 portfolio would have cost him $107,453 if he had used cost averaging, whereas if he had used the lump sum approach he would have was found to be worth $109,360. A 60/40 portfolio is split 60% stocks and 40% bonds.
Mr. Norton said the market tends to rise more than it falls, so investors who drip money into the market often buy when prices are rising.
He added: “Another disadvantage of pound-cost averaging is that it changes the asset allocation of your existing portfolio until the new amount is fully invested.” Therefore, holding extra cash can skew your overall investment mix and make it look different than you originally planned. ”
Benefits of early investment
Pound-cost averaging may not be the most advantageous option if you have the amount to invest in a lump sum, but if you can afford it, it's a good idea to make monthly payments into your investment account. This is to ensure that you regularly save money for your future.
Guy James, 26, from the South West, first started investing three years ago. “First he invested £100 and immediately set up a direct debit,” he said. “He doesn't have time to pay attention to it, so he just invests £25 a month in trackers and recommended funds.”
Initially, he invested in stocks, but has since invested in S&P 500 and FTSE 100 tracker funds, as well as several funds he found on his recommended list, including Baillie Gifford Managed.
Stockbroker Hargreaves Lansdown said most of its investors choose to invest in March, with a close second choosing to invest in April, around the end of the tax year. Investing at the beginning of the calendar year allows you to use up your remaining annual ISA allowance before you lose it, but it is better to park your money as soon as the new tax year starts, as early investors enjoy more time. It may be good. market.
For example, AJ Bell calculates that someone who invested £3,000 in a global equity fund on the first day of each tax year from 1999 to 2023 would now have a pot worth £200,373. Become. However, if he had invested the same amount on the last day of each tax year, the pot would have been worth £191,102, almost £10,000 less.
