Hello, I'm Clare and welcome to Smart Investor, the show to help you get the most from your investments. Although we can't offer personal advice every month we'll tackle the burning issues affecting investors. And today I'll be exploring the long-term benefits of investing regularly versus investing a lump sum. As ever, if you're not sure about investing please seek independent financial advice.
One of the biggest misconceptions about investing is that you need to have a large amount to get started. But in actual fact, you can invest from as little as £50 a month and there are a number of benefits of investing regularly. Contributing smaller amounts can be a good way of getting into the investing habit so that you can meet your long-term savings goals.
And if you're new to investing, it means you can give it a go without worrying that you're committing too much money all at once. Investing every month is a good way to use your ISA allowance as you can spread out your payments over a year.
In this tax year, which started on the 6th of April you can invest up to £20,000 in ISAs. One of the main benefits of investing regularly is that you don't have to spend time focusing on whether or not you are buying at the right or the wrong time as you would if you were investing a large lump sum. As you'll be drip-feeding money in gradually, in some months, when the market has risen the amount you're investing will buy you fewer units.
But when the market has fallen, the same amount will buy you more units. This doesn't necessarily mean you'll get a better return than if you invest a lump sum but it can help smooth out stock market volatility. And the technical term for this process is Pound Cost Averaging.
Remember, though, that all investments involve risk and you might not get back the amount you originally invested. Nobody can predict how and when stock markets will go up or down because so many different forces are at play. Investing on a regular basis rather than trying to time a lump sum investment can help you become a more disciplined investor, and it removes the worry that you're putting your money into the market at just the wrong time.
You invest every month regardless of whether the price is high or low. It reduces the risk of you making investment decisions based on your emotions and avoids delays in putting your money to work. The longer your money is in the market the greater the chance of you reaching your goals. Ideally you should remain invested for at least five years, but preferably longer. For more information on how to get into the habit of regularly investing check out our website.