Investing Cash ISA monies into S&S Isa advice

Pound cost averaging is promoted heavily online, primarily by people who offer investment services as an 'advantage' of signing up to their monthly plans which get you hooked on giving them money month in month out and have it seem less scary and more affordable than giving them a lot of money all at once.

Looking at the maths of it, if markets go down and then go back up a bit while you are drip feeding the cash you can find yourself sitting on a better gain than if you had invested on day one at the expensive price (although you will have missed out on dividends along the way). Yay for the magic of pound cost averaging.

Of course, this is only half the story. Instead let's say you split your cash up to feed in over the next two years in quarterly chunks with the FTSE actually being at the following prices:
6450 (today) 6600 6850 7000 6800 7300 7550 6900 6700 (3 October 2015)

If you had invested everything today you would be sitting on a gain of 4% from 6450 to 6700 and have two years' worth of dividends (say 3% each). Total return in cash terms, 10%.

If instead you had split into 9 chunks, despite the market ending 4% up, you would actually be sitting on a 3% loss from your average buy-in price of ~6900. Also as your cash dripped in over the period it was only fully invested after two years and so on average you were only half invested and will only get half the dividends - say 3% total rather than 3% in both years.

With those random figures it is shown that your total return is (4% + 3% + 3%) = 10% with the 'buy now' method vs (-3%+3%) = 0% with the drip feed method. The magic of pound cost averaging cost you all your return and now you have been beaten by inflation rather than beating inflation which was the goal.

If markets would kindly just go up in a straight line you would always be investing at the 'top of the market' and it would not be a problem - "whenever you can get the money together" would always be the best time to invest. If your money was coming from monthly salary there would be a natural dripfeed but if it was coming from a bonus or from exiting an old investment product it would be there as a lump sum straight away, ready to be dumped into the market right now.

In reality, markets don't go up in a straight line. But over time they do generally go up and they produce income along the way. So unless you think you know better than everyone else out there, typically one should not try to play a market timing game and should instead just aim for 'time in the market'.

Now of course you may think in your personal view that some of the indexes you are invested in are looking high. So perhaps you would put less into (say) USA and more into (say) Europe, within your 4, rather than 2500 each - I know you mentioned the 2500 was just keeping it simple. Or perhaps one of your indexes is a bond/gilt tracker and you think they are too high and would prefer to skew it into the three equities trackers. Presumably since you first invested in your S&S ISA some of the indexes have already moved from their original levels and some 'rebalancing' may be in order anyway

Or perhaps you think it should all go in the bonds tracker instead of the equities trackers to preserve against the market going down which is the fear that was leading you towards wanting to dripfeed it. If you are strongly worried about a crash then you might as well leave it in a top cash ISA at 1-2% for now rather than buying a bond tracker.

If you want to take a view on the market and think that on balance it will be cheaper to buy some of these indexes later over the next couple of years rather than now, which is why you think pound cost averaging will work for you, why are you not selling your existing holdings of the indexes? The answer may be that you want to be a passive investor and not worry about trying to time peaks and troughs. That's fine, so if you have an extra 10k, just put it in today and don't worry about peaks and troughs.

Personally, if my S&S ISA was just 4 trackers and I found myself with another 10k of investible cash, and I was not utterly convinced that those 4 trackers were going to go up rather than down... I would buy something different to make my portfolio 5, 6, 7, 8 or more holdings and thereby hedge my bets. In the long term a portfolio being rebalanced between 8-10 assets and cash is probably going to give lower volatility and perhaps better returns than one with 4 assets and cash.

So for example if your 4 trackers are global equities, UK equities, investment grade corporate bonds and real estate, you might not have given much thought to the fact that while each index is very well diversified in terms of the number of companies in its index, it is likely not very well diversified in terms of size of company or class of asset it holds. You may not have much in the way of smaller companies, emerging markets, etc., and might look to use some actively managed or strategic funds to improve your exposure to the different classes of assets out there in the market.

For example if you were concerned about market falls (which was why you considered dripfeeding) but all you had in the non-equity sector was UK investment grade bonds or gilts you could look at funds of higher yielding bonds, overseas (including emerging markets) corporate and government bonds, property funds, infrastructure funds, absolute return funds, capital preservation-focussed investment trusts etc. etc.

Reading your replies it sounds like you don't have anything in gilts (government bonds) or corporate bonds or this non-equities stuff. You don't necessarily have to go to Cavendish and say I want 1k of this government bond here - you would buy via funds. At the moment gilts are expensive because interest rates are very low - and if a gilt is going to pay a nice big £X at maturity that is going to be in great demand - which causes the price of the gilt to rise today. As we settle into this low interest rate economy, the gilts and other 'safe' bonds have been getting more and more expensive, which is good for bond funds which hold them - but looking at charts of bond funds can be misleading, because the next few years can't be as good as the last few.

What these price rises mean is that although you'll get a guaranteed sum when the gilt matures, it won't actually be very much more than it costs you to buy today AND if interest rates rise in the meantime there won't be as much demand for your gilt as there is now when interest rates are really low and people are willing to pay a lot for a very low amount of interest. So the value of gilts can go down. This is why kidmugsy says if you were going to put some of your portfolio into gilts as a safe haven, 'pro tem' (from the latin 'pro tempore' : temporarily), you might as well keep the low risk component of your portfolio in cash whether in ISA or not. That way you get a small amount of interest with no risk to capital, rather than a 'safe' corporate or government bond which pays a small amount of interest and could go down in value when market conditions change.

I realise this probably creates more questions than it answers but if you are investing ten thousand quid then presumably you hope that with ten years compound growth at a not unreasonable 7% you'll be walking away with double your money. So, if you feel you are out of your depth then you should probably recognise that by spending a couple of hundred quid of your ten thousand quid future profit, in buying books or just your own personal time reading and researching, you will be on a better footing.

Good luck with whatever decision you make.