Aisa Direct

• Information
• Smart Money
• About Us
• Servicing you
• Best Buy Lists
• Ask an Expert
• Product Sales
• Financial Guidance
• Compliance Guides
• Qualifications

Secure Client log-in

This website contains information which may or may not be applicableto your own situation and circumstances.

Any information or advice on this site does not constitute a personal recommendation. If you have any doubts as to whether a product or service is suitable for you, please seek independent advice.

Regular v’s Lump sum Investment

What are the benefits of pound/euro/dollar/ cost averaging? Fundamentally we are told that making regular that a regular contribution (say monthly) by an investor is spreading his/her investment and taking advantage of market downturns. We are told that market falls are GOOD for clients investing using this process as they have the opportunity of buying units at cheaper prices.

However, when we did our own modeling using figures provided by institutions, using excel spreadsheets to calculate returns (excluding charges) we discovered that most of the time this claim was in fact not true!

A Hoax?

It will work only if the short term falls are then made up by the market recovering. Maybe obvious, but what is not obvious is that the market needs to recover by a huge 70-80% above the lows. The companies often put headlines on such presentations like, “How to make money in a falling market”. However, the figures provided by companies typically showed large rapid reductions in asset values, sustained over the majority of the period expressed, and then terrific gains in the last 25-30% of the time period.

Clearly, it should come us no surprise that if you are obtaining terrific gains at the end, over and above the purchase period over most of the time period, then you will make a profit! However, this is not the same as saying you will make money from a fluctuant or decreasing asset value!

When we actually plugged in the actual figures for the FTSE 100 index over the last 5 years then a single lump sum of £100,000 made far greater returns than a regular annual contribution of £20,000 (invested monthly at £1,666.67). In fact, the lump sum still made money, whilst the regular premium lost money (as of end of September 2008). This was ignoring any charges which are likely to exaggerate the result as regular premium tend to cost more than lump sums.

Short term gains?

So we went further and also put in the actual figures for a 2 year period selected from the FTSE 100 index showing a gain over that period. The lump sum contribution out-performed a regular contribution in all examples.

Finally we did a contribution using the FTSE 100 index through to today (October 2008) as though a contribution had been made in the middle of every month for 2 years. Unremarkably, the regular premium showed a loss as did the lump sum. If charges were taken into account the regular premium would have made a greater loss than the lump sum.

Is there any benefit in regular contributions?

Investors who are reluctant to commit lump sums to the market can divide their lump sum into 5 amounts and invest over the period thus isolating the timing of contributions as being an issue.

Peoples needs for investments and savings do not go away when there are troubled markets. A family's need for retirement planning, school or college fees planning or long term savings remain and better advice is required. Asset allocation has a larger part to play than TIMING! Timing can lead to greater gains and greater losses but it becomes an increased gamble. Whereas the correct asset allocation can outweigh some of this risk and provide a balanced portfolio.

The biggest risk for an investor is NOT actioning an investment plan in the first place!

To illustrate this, consider an investor whose plan grew 20% lower than expected. Instead of a pension fund of £300,000 he may have a pension fund of £240,000. Compare this to the situation of an investor who did nothing 'because the time was not right' - his pension fund would be ZERO!