Drip-feeding

El_Selb wrote: »

In my research, some of the extra advice i was given (on this board largely) was to drip-feed my money. As my focus was on selection of assets rather than anything else, this was advice I ignored at my peril!

But you would have also undoubtably received advice from others who would have advocated that you *don't* deliberately drip feed your money, and simply invest however much you can spare, as and when it becomes available.

If you held back most of your cash and markets had then gone up in the last couple of months and it was becoming more expensive to deploy your chunks of the 4k, you might have thought that *that* advice was something you ignored at your peril.

I hadn't considered that the market may go down. I figured, why only invest £500 now and lose out on the returns on the other £4K - invest it all straight away and enjoy the returns straight away!

Of course, shortly after I invested it all kicked off in Ukraine (at least, I believe this is what caused the adverse reaction) and my portfolio of a fund, tracker and individual equity has fallen in value, losing about 3.5%. I'd of preserved the value of most of my cash by leaving it in the bank and riding the Ukraine storm out.

There's a variety of factors causing the markets to move up and down. Ukraine is one blip. There are plenty of others - views on global growth and quantitative easing and interest rates and exchange rates change all the time in the major economies.

Amazon.com is down 20% in the last three months - the market considers it to be worth $33bn lower than what they recently priced it at. What proportion of that is to do with Ukraine? How does Crimea affect Kindle sales, or cloud storage, or deliveries of groceries in Manhattan, or the cost of a 1.2 million square foot warehouse facility in middle America? But actually when you look at it, the Amazon share price is not really any lower today than it was six months ago. Just somewhere a few months back, the market thought the company was worth $180bn instead of $150bn, but now they think $150bn is the right price again.

So, you have to accept that sometimes individual companies, and maybe the market as a whole, will move up or down in one month or week or day, as much as you would make in an entire year in a cash account. Generally, the long term is up, with adjustments and corrections all the way.

Sometimes these corrections might be -40%. In that case it is handy to have some cash kept back, or to have some of your assets in funds that don't drop by 40% at the exact same time, so you can switch between your funds and buy more of the ones that have gone cheap. But if you hold back money in cash or in low-risk assets waiting for the sales, you miss the 100% gain that happened before the 40% fall, and overall you don't necessarily perform better.

So, maybe you would want to do the slow drip method if you foresaw a crash or were buying something really very volatile - but there's an argument that if you foresaw a crash you should simply stay entirely in cash instead. If you try to remove the risk from investing a certain sector you also limit the available upside rewards. So most people spread themselves around sectors.

As you mentioned, you had spent most of your pre-investment time deciding what sectors you thought would suit you for the long term. You say your "research and efforts were devoted to the assets I was buying" ;and "my focus was on selection of assets". As you haven't reached the long term after 2 months in the market, you can't say whether those were good or bad choices but presumably there is logic in the choices you made, right?

I know we're not talking about big amounts, but the principal is the same - any newbie investors - actually listen to the drip-feeding advice! It makes sense.

Lots of investment platforms will extol the virtues of drip feeding, pound cost averaging. They will do you a pretty graph showing the price at 100 and then 95 and then 90 and 85 and 95 and 100 and 105 again, and then tell you how the drip feeding has helped you make more money by buying more units at a low price so you make good money even though the market only went up by 5 points.

One of the reasons they do this is they want to get newbie investors to sign up to an affordable plan with their firm, and it is much easier psychologically to hook someone in on £100pm, than to hand over £10,000 of life savings at once - particularly if you can show them that price drops can be thought of as a good thing with the drip method. But this is simply psychology rather than "powerful maths".

Very few firms show the flipside which is that if the price over the next few quarters is say105, 110, 105, 98, you will end up with more units if you just buy now at 100 - rather than wait in cash for those later quarters and buy more expensively while missing the income and growth. Long term, we do expect markets to go up overall and in something like two thirds of every historical 10-year period you could test, simply investing all on day 1 and getting 10 years of growth is better than dripping it and only effectively getting 5 years of growth and half the dividends you could have had.

Ultimately you should probably not be buying anything that you don't expect to go up over time or produce income over time. So, if you already have the money, and you expect the share or fund to go up or deliver income better than cash over the next one or three or five years, it seems counter-intuitive to choose to buy it the average price available the next few years (and only buy the last of it in the last month of those one or three or five years, missing 90%+ of the income or growth).

If you already have the money to buy in and you choose to dripfeed, you are basically saying that on the monthly coin toss, some of the units will hopefully be bought at a better price than today, rather than even worse price, and you think this will help you as markets fall.

It is a pessimistic way to look at markets. Some would say it's a cautious way to look at them. IMHO if you need the caution you are perhaps admitting that the funds you selected after spending ages researching, are in fact above your real risk tolerance and you should have selected something less volatile.

If you split up your cash into chunks and really honestly think you would prefer the result of putting your last £400 in your funds in 11 months time, and getting 1 month value change and dividend on it, instead of investing today and getting 12 months value change and dividend on it, then that really says you do not think these funds will deliver a good result over a long time period from their current level.

So, that calls into question why you would be putting any of the other money in today and not also saving the other £4000 in your cash account until month 11.

Everyone has their own comfort zone; investing only half your cash is one way to limit risk. Another of course is to invest only some of your cash in equities and invest other bits of it in debt, real estate, gold etc etc etc while leaving a much smaller amount of cash uninvested. That comes back to your initial choice of funds which you spent all that time on.

If when doing that initial choice, "I hadn't considered that the market may go down", there is a bit of a problem, because the FTSE goes down on hundreds of days every year. But if you are happy that *in the end* these funds will deliver a suitable return over the timescale you can afford to be invested, you have nothing to worry about.