One of the best ways you can build good financial habits is by drip-feeding money into an individual savings account (ISA) every month.
By paying a set amount into your stocks and shares ISA regularly, you can potentially reduce the impact of stock market volatility on your investment’s performance. Besides, you may not have a large lump sum to squirrel away, particularly when living costs are rising, but still want to make use of your ISA allowance so you can benefit from tax-free returns.
Saving even a small amount into your ISA each month can be a great way to get started. Read more in our guide Everything you need to know about ISAs.
If you’re looking to invest in an ISA, fund platforms such as Fidelity, Hargreaves Lansdown and AJ Bell can help narrow down your choices with recommended fund lists, which might highlight 50 funds out of the 3,000 plus available to UK savers. They also offer ready-made funds for a range of different risk profiles if you don’t want to pick investments yourself. Bear in mind that there are charges associated with stocks and shares ISAs and you’ll pay a fee to the platform as well as for the funds held.
Here, we consider the benefits of regular investing into a stocks and shares ISA, and how it works.
How regular investing works
Regular investing, as the name suggests, involves paying a certain amount into your investment account each month, rather than investing a lump sum. The process means that you may benefit from what is known as ‘pound-cost averaging’. Essentially, this means that when stocks and shares fall in value, your money buys more shares or investment units, and when they rise, you buy fewer. In theory, you benefit from buying your investments at their average price over an extended period.
Let’s say, for example, that you’re drip-feeding £3,000 into the market over the course of 12 months. If you invest £250 a month, and a particular share falls to £25, you’ll buy 10 shares that month. However, if the price of that share rises to £50 a few months later, the same £250 invested in that particular month will buy you five shares. The price of the investments you buy usually doesn’t stay the same for long, and by investing regularly, any movement in their value has less impact on your overall returns.
However, regular investing may not be a winning strategy in a rising market. In this scenario, your money will buy fewer shares each month as the market rises, whereas if you’d invested the £3,000 as a lump sum when prices are low, you’d benefit fully from any market growth. Ideally, though, you need a timeframe of at least five years or far longer when you invest, so the chances are there will be some bumps along the way.
The benefits of regular investing
Besides the potential benefits of pound-cost averaging, there are a number of other advantages to regularly investing in stocks and shares ISAs.
Importantly, investing regularly means you avoid trying to time the market, which is difficult for even the most experienced investors. Just because the stock market has fallen in value doesn’t necessarily mean that it can’t fall further, for example. There are a huge number of factors that can affect an investment’s performance, from economic conditions to political turmoil and sector and company performance. Investing on a regular basis can help take the decision of when to invest and some of the emotion out of the investment process.
By regularly investing, you’re developing a disciplined investment strategy that can be sustained over time. As famous investor Benjamin Graham once said: “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behaviour discipline that are likely to get you where you want to go.”
History shows that over long-term periods, given enough time and patience, you could potentially make a substantial profit from investing compared to staying in cash but, of course, there are risks involved, and past performance cannot be relied on as a guide to what will happen in future.
Regular investing is also usually very simple to set up. Most stocks and shares ISA providers enable you to set up a monthly direct debit from your current account into your ISA, and you can usually choose from a number of different investment options.
Is regular investing right for you?
When you open a stocks and shares ISA and start looking at investments, you’ll see that any ready-made funds are usually spread across different risk profiles. If you aren’t comfortable with the idea of losing your money, or you think you’re likely to need your money in the next couple of years, then you might find a cash ISA is more suitable. Read more in our guide How cash ISAs work.
If you do choose to invest, the strategy you choose comes down to your personal circumstances and preferences. If you don’t have a lump sum to invest, and you’re investing money from your income each month, it may make sense to set up a regular investment.
But if you have a lump sum to put away, you’ll have to weigh up the risks of trying to time the market, or you might decide you’d rather invest money each month regardless of market conditions. If you’re more likely to take a cautious approach, regular investing may be more suitable. You can learn more about this in our article What’s your attitude to risk?
As with any investment, there are no guarantees that investing regularly will be more beneficial than investing a lump sum, as no-one can be certain which way the market will move next. Ultimately, the value of your investments can fall as well as rise, and you may not receive the amount you originally invested. However, over the long term the hope is that regular investments can reduce the impact of stock market volatility and potentially increase returns.
Finally…
Setting up a regular investment into a stocks and shares ISA may only take a few minutes, but investing can still be daunting. It’s really important that you take your time to find the right account and approach for you that you’re comfortable with.
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