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Lump sum vs 'drip feeding'

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  • Aegis
    Aegis Posts: 5,695 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    edited 26 September 2009 at 10:42PM
    This is probably a petty question about phrasing (or I'm assuming it is,) but are there any IFAs working for banks? Or to rephrase that, do any banks have FAs that can recommend (whole or 'nearly whole' of market) products other than the bank in question operate?

    I'm talking about the 'normal' banks here - HSBC, Barclays, Natwest, LTSB etc, the ones the general public normally go to for such things.

    There are financial salespeople attached to banks who have the title "IFA", but are effectively just multi-tied advisers. For example, the IFA salesforce at HSBC has access to around 15 collective investments, with roughly 20-25% of those being HSBC funds. They then have a few structured products available as well.

    I believe they get away with being called whole-of-market because they can get anything on execution-only terms, but anyone going for execution-only purchase of a unit trust or OEIC at 3% initial and full trail commission or on a fee-basis for about £150 an hour would be something of a rarity.

    All in all, with a product range of probably 25 investments in total, I'd be reluctant to refer to them as genuinely independent.
    I am a Chartered Financial Planner
    Anything I say on the forum is for discussion purposes only and should not be construed as personal financial advice. It is vitally important to do your own research before acting on information gathered from any users on this forum.
  • nrsql
    nrsql Posts: 1,919 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    dreamonsu wrote: »
    I have had a bit of a windfall and have £2000 that I would like to put into an existing s + s ISA that I pay a regular £50 a month into (so I have paid £300 so far this tax year and will pay another £300 into this year). I don't know whether to put the whole amount in now or pay it into the highest instant access account I can find and 'drip feed' £250 a month. I have heard about the merits of 'drip feeding' but don't know enough to decide if that is what I should be doing. Could I ask for some opinions please?

    Fun thread but to get back to the OP:
    It depends on what you think the market you are investing in will do and how strongly you believe it.
    If you are certain this is a low point then dump in the lump sum.
    If you think it's going to increase but think there may be some ups and downs in the short term then drip feed.
    It doesn't have to all or nothing - can drip feed and add lump sums when you think the time is right.

    Just as important is where you invest - a lot of people think that sterling is in for a rocky ride and the UK will struggle compared to a lot of other countries. The ftse though has a lot of multi-national companies.
  • dreamonsu wrote: »
    I'm going to look at the L&G website and find something a bit riskier for my £2k and put the lot in (I believe it doesn't have to go into the same fund so long as it's the same provider?). After all as I have already said, it is money that I never expected to have.

    Risk is partly down to perception, like the poster says above it could be the uk has more risk then the foreign funds which have always been labelled as volatile.

    That leads back to the lump sum vs regular. Regular just gets an average price, it could be worse or better then the lump but either way it reduces risk of holding an exceptional price imo.

    The main point is that market worth holding at any price. The uk has been in decline for a decade, so have the american markets when adjusted for inflation.
    With the current news of larger debts then ever Im not inclined to believe they'll break this trend, ie. its a secular bear market like has existed for periods in the past (prior to the 80's and mass privately held shares courtesy of Thatcher)

    A lump sum into an isa every year is a kind of regular investment.
    This emerging market fund manager points out 7k into an isa with his fund every year for the last 10 years would now be worth £210,000.
    That could be taken as a boast or good luck but really its a statement of a long term growing market (secular bull) and also long term regular investment averaging volatile prices

    http://iball.iii.co.uk/2009/09/25/iball-interviews-mark-mobius


    z5336173.png



    L&G are really conservative afaik which is good for consumers in many ways. They do have a few 'riskier' funds abroad and Ive used their pacific tracker for a while. They also do a managed pacific fund which you might prefer especially with a lump sum
    That fund uses about five different currencies afaik where as a ftse fund just uses one, its not more risky unless you really think uk will be the best world performer from here
  • There's a video of Ken French (famous American professor of financial economics) answering this question here:

    http://www.dimensional.com/famafrench/2009/06/dollar-cost-averaging.html

    From the associated article:
    Does it make sense to dollar cost average? It depends. Standard financial analysis says dollar cost averaging is suboptimal. If you focus on only your investment outcome, investing a lump sum immediately lets you construct the best portfolio you can today; slowing the process with dollar cost averaging just keeps you in something other than your best portfolio until you are done. Behavioral finance provides a different perspective. Because of the difference between the way people react to errors of omission and errors of commission, dollar cost averaging may give investors a better expected investment experience.
    --C
  • jamesd
    jamesd Posts: 26,103 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    purch wrote: »
    Drip feeding arguments are just a selling tool for the 'Industry' to encourage people without lump sums to invest. ... How better could you get people with only small amounts available monthly to invest, to get involved in the market, than by telling them that, actually it's the 'best' way to invest.
    That's because it has these useful properties:

    1. It keeps investing through inertia, rather than not doing it at all.
    2. It's when the money becomes available. Grab it while you can before it's spent.
    3. It discourages buying high and selling low by buying at both, when most people would otherwise go to pure buy high and sell low if they were making the decisions.
    purch wrote: »
    For these arguments to have any validity, you would have to assume that investors such as Warren Buffet and George Soros are complete and utter morons.
    You just have to consider the properties of the audience the advice is intended for to see the validity.

    Anyone who takes more of an interest and who has some ability might be able to do better by paying attention to economic and market conditions, but that's not most people. You've already proved that you're definitely not most people.

    Even so, money from salary becomes available regularly so there's the decision between spend, cash and where to invest to make, as well as the decisions about what to do with accumulated capital.
  • purch
    purch Posts: 9,865 Forumite
    Yes.

    The only thing that I object to, are people who try to assert that £/$ cost averaging is a far more successful method of investing, when obviously is isn't.

    It's horses for courses, and anything that can encourage the average man in the street to take a proactive approach to investing has to be welcomed.
    'In nature, there are neither rewards nor punishments - there are Consequences.'
  • purch wrote: »
    Yes.

    The only thing that I object to, are people who try to assert that £/$ cost averaging is a far more successful method of investing, when obviously is isn't.

    It's horses for courses, and anything that can encourage the average man in the street to take a proactive approach to investing has to be welcomed.

    That's essentially what Ken French was saying. By drip feeding to get to your target risk level, rather than jumping straight to that allocation, you forgo the additional expected returns that maximize your expected utility.

    Ie, if your risk tolerance says you could stand to lose 20% in a year, then why is drip feeding to be in that position later any better than doing it now? If you're not comfortable to lose 20%, then just have a lower risk portfolio.

    Of course it's human irrationality (behavioral finance) that explains why it may be preferable psychologically. It's not preferable from the point of view of financial economics.

    --C
  • Drip feeding is best someone who hasnt looked at stock prices for a month and is on holiday the day the shares are bought.

    Lump sum would rate personal judgement over being blindfolded, which I agree is easily better unless the investor knows nothing anyway


    Compare a lump sum of 10k into barclays shares Sept 08 bought at price 440p Then the drip feeder does the same with £833 and buys at the same bad price but also buys the next month and so on.
    A year later the drip feeder makes a profit and the lump sum guy is still waiting. Really what would happen is the lump sum guy doesnt commit absolutely all his money into one share and also has the sense to buy more at the bottom or at least on the way up but that was not in the question.

    Put plainly I think drip feeding is best for the average consumer on this forum at least until they know better for themselves
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