Drip feeding is a waste of time

bigfreddiel

If you can lump sum investments beat drip feeding in the long term.

Drip feeding can be costly in a couple of ways, the cost of purchasing an investment, and the loss of dividends because the entire sum is not invested.

You are also at risk of just missing each upturn in the market if you drip feed.

Of course you may not have the funds to make a decent lump sum investment, but you could use a 5% savings account to build up your lump sum.

Just a thought, and it has been backed up by research, and shown a lump sum investment made at the very worst downturns in the market over the last 25 years still beats a drip feeding methodology.

Drip feeding is purely in the mind, because you feel better that you may have bought your funds cheaper than a few months ago, but that's all it is, in reality the sums are too small for drip feeding to have much influence on the final outcome, and any gains you may make will be outweighed by the dealing charges.

Cheers fj

Archi_Bald

You should perhaps have qualified that you are talking about investments, not about savings. As drip-feeding into high interest Regular Savings accounts is rarely a waste of time.

Monevator roughly agrees with you when it comes to investments: http://monevator.com/lump-sum-investing-versus-drip-feeding/

InvestInPoker

A lump sum investment will have a higher expected value than the same amount invested slowly by drip feeding over time. That is assuming they both have the same end date for calculating expected returns. The lump sum will have higher volatility, but the better expected value for when you come to cash it in.

The drip fed portfolio will however have lower volatility, especially for the first year or two when perhaps beginning investors would be most nervous. This is the gain you make by sacrificing some long term returns. It is entirely up to the individual which profile you would prefer.

george4064

I agree with you, this takes the assumption that the investor has a sum of cash sitting there ready to invest.

If that were not the case, it is better to make more regular smaller investments more frequently (and therefore earlier), than saving up a cash position and investing it all as a lump sum at a later date.

I just wanted to clear that up, because I think some people do get mixed up with the difference between drip feeding and regular investing.

kinger101

bigfreddiel wrote: »

If you can lump sum investments beat drip feeding in the long term.

Drip feeding can be costly in a couple of ways, the cost of purchasing an investment, and the loss of dividends because the entire sum is not invested.

If you're buying shares, yes. Most people are purchasing funds. As for the dividends, these are always priced into the shares anyway.

You are also at risk of just missing each upturn in the market if you drip feed.

And any sudden downturn

Of course you may not have the funds to make a decent lump sum investment, but you could use a 5% savings account to build up your lump sum.


In which case, you miss the upturns and the downturns. It's really a question of whether equities beat cash. If equities are better, then the money should do in as soon as possible.

Just a thought, and it has been backed up by research, and shown a lump sum investment made at the very worst downturns in the market over the last 25 years still beats a drip feeding methodology.

This is a tautological argument. The problem is predicting the top and bottom of the market. Or predicting whether cash is better then equities.

Drip feeding is purely in the mind, because you feel better that you may have bought your funds cheaper than a few months ago, but that's all it is, in reality the sums are too small for drip feeding to have much influence on the final outcome, and any gains you may make will be outweighed by the dealing charges.

Cheers fj

The reality most people drip-feed because they are making regular monthly contributions into an ISA or pension. If you do have a lump sum, presumably the cautious investor would spread the risk by not putting all their eggs on one basket.

bowlhead99

bigfreddiel wrote: »

If you can lump sum investments beat drip feeding in the long term.

If you have a lump sum available as 100% cash and want it to be spent so that it becomes 100% investments, then you have a choice.

- Invest it immediately in the investment and start to receive the risks and returns of 100% investment and 0% cash right away.

- Invest it gradually over time so that your average return for the period is somewhere between the returns (and risks) of investments and the returns (and risks) of cash.

As the returns and risks of investments are, on average, higher than those of cash, which is the whole reason you are considering making the investment, then it stands to reason that investing the lump sum immediately for more 'time in the market' rather than 'time in cash', will produce a better result. The research, unsurprisingly, backs up this common sense conclusion.

Of course, some people who do not hold investments might prefer not to dive directly from one end of the risk spectrum (100:0 cash to investments) to the other (0:100 cash to investments). For them it might be less nerve-wracking to accept the theoretically-inferior returns and cling on to the lower-risk assets for longer, as they slowly drip into the market. Alternatively, they could go 100% into investments but lower risk investments than they ultimately want to end up at, and gradually tweak the balance over time.

With the exception of a sudden windfall such as inheritance or redundancy - when serious thought should of course be given to the risk profile that one is willing to dive into and over what time period - many people will find they have new cash available each month, quarter or year out of their salary or other income, which is surplus to their expenditure or savings needs. This gives a natural 'drip feed' and is generally why I am a drip feed investor. Effectively following the 'invest as soon as you have the cash available' method I can say I am investing the lump sum as soon as I have it, even though it might look like I am a drip feeder.

Of course you may not have the funds to make a decent lump sum investment, but you could use a 5% savings account to build up your lump sum.

The whole premise of 'lump sum is better than drip feeding' from the studies to which you refer, is that the lump sum gets your money at work in the market earlier; which on average, gives a better result.

To then imply that someone could claim to follow that superior-returns methodology by building up to a lump sum in cash month by month and then deploying it all at once at the end of the year as a 'lump sum' and then still be characterized as a 'lump sum investor', breaks the model. In that situation you would NOT get the benefit of your money being in the market the maximum time, it would be in the market the minimum time and you would still have the undesirable effect of flipping risk profiles from 0:100 to 100:0 on one day of the year.

The only reason to 'build up' to a lump sum for investment rather than investing when the money is available, is to avoid any practical 'minimum investment size' or 'minimum transaction fee' issue.

Obviously with 5% current account and regular saver bank accounts being made available as marketing investments by banks in this otherwise low-interest environment, and the implementation of tax free interest rules from HMRC, the relative "performance penalty" for holding cash rather than investing right away may not be so severe as it was in other points during history.

jimjames

Unfortunately my employer has strangely chosen to pay me every month rather than my whole career salary in one lump sum so I have to invest monthly.

To me it seems a bit daft to not invest monthly and wait for a lump sum instead. Surely it's better to be in the market as soon as possible if the research you quote is correct.

enthusiasticsaver

I have heard this but I invested a lump sum (£33k) in my Vanguard Lifestrategy fund last April when markets were high and it is now worth £2k less. The flip side is my £500 monthly drip feeding payment is now buying more units than it did in April or May. The general assumption that more time is better does depend on when you invest and when you withdraw. I do not intend to withdraw any time soon so it is not a problem for me though.


A number of people have said to me don't underestimate the power of dividend re-investing but as I am in an Acc fund of the Lifestrategy fund there are no dividends so I don't think that always applies.

masonic

enthusiasticsaver wrote: »

A number of people have said to me don't underestimate the power of dividend re-investing but as I am in an Acc fund of the Lifestrategy fund there are no dividends so I don't think that always applies.

There are dividends, and they are being reinvested to buy more of the underlying assets of the fund. It just isn't visible to you.

bigfreddiel

Archi_Bald wrote: »

You should perhaps have qualified that you are talking about investments, not about savings. As drip-feeding into high interest Regular Savings accounts is rarely a waste of time.

Monevator roughly agrees with you when it comes to investments: http://monevator.com/lump-sum-investing-versus-drip-feeding/

I think my very first line specified investments, try reading it again and let me know if it doesn't.

Thanks for your comment, obviously if the product is geared towards drip feeding and it suits your purpose go for it.

Cheers fj

bigfreddiel

InvestInPoker wrote: »

A lump sum investment will have a higher expected value than the same amount invested slowly by drip feeding over time. That is assuming they both have the same end date for calculating expected returns. The lump sum will have higher volatility, but the better expected value for when you come to cash it in.

The drip fed portfolio will however have lower volatility, especially for the first year or two when perhaps beginning investors would be most nervous. This is the gain you make by sacrificing some long term returns. It is entirely up to the individual which profile you would prefer.

You shouldn't be investing if it's short term, anything less than ten years is short term.

Cheers fj