Drip feeding is a waste of time

bowlhead99

jimjames wrote: »

I thought you were an experienced investor but based on this post I'm now not so sure.

This sounds pretty condescending especially if you're going to go and say:

With many (most?) platforms there is no difference between monthly and lump sum investments and most have no fees at all for funds. Maybe some differ (iii?) but I've never paid any more to invest monthly than a lump sum and currently pay nothing for investments other than an annual fee.

There are no platforms which "have no fees at all for funds". As you point out, you have fees, but choose to pay those fees annually based on how much it's all worth - and you personally chose a provider that charges such fees year in year out even if you don't transact.

As you well know from the hundreds of posts about it on these forums all the time, there's a load of different pricing structures, some with fees per transaction, some with fees per period, and some like Youinvest with a combination structure that charges a transaction fee and then as a consequence can charge a lower annual percentage fee than many of its pure percentage-based rivals.

And the "annual percentage-based fees in arrears" model is largely limited to the open-ended funds arena ; things that need to be traded on an exchange like company shares and ETFs and investment companies and REITS and investment trusts have had a transaction-based fee model from stockbrokers for a century or more.

So it probably shows naivety to say that someone is wrong to consider whether the minimum efficient transaction size allows them to invest immediately or save up a bit first. Investment type and investment provider can make it highly relevant.

I don't agree entirely with the way freddie made his point as it was somewhat counterintuitive, thus my comments in my reply above, but happy to acknowledge that one has to consider efficient transaction sizes as I mentioned in my earlier post; these can result in a trade off in terms of investment timing and doesn't imply he's an inexperienced investor - he's just explaining it overly simplistically which is something I never dare to do ...

jimjames

bowlhead99 wrote: »

This sounds pretty condescending especially if you're going to go and say:

That wasn't my intention, now edited. I was a little puzzled as the post didn't seem to match freddie's previous investment posts and maybe had too many generalisations in without explanation but then as you've highlighted I've done the same. "I know what I meant to say"

Malthusian

That is something I disagree with, it would be better to invest the money saved each money as soon as possible rather than holding it back until you have a larger sum. Time in the market is important, especially if investing in income yielding investments.

That depends if you can beat the 5% monthly savings account rate assumed by the OP. It's certainly possible for equity investment to return more than 5%pa, but not certain.

In general of course the OP is right. Drip feeding is a good thing only if the alternative is not to invest at all or to invest a lump sum, panic and pull it out at the first market drop. In general lump sum investing is always better.

Instead of working around an irrational fear of volatility it is better to dig out the irrational fear at the root.

cloud_dog

bigfreddiel wrote: »

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

It's horses for courses but, I'm going to disagree.

Unfortunately you cannot get away from the psychology of investing lump sum(s), and this can (does) have an impact. Your thoughts are very valid on paper but in the real world you also have to consider the intangible.

I posted this on another thread (a little while ago) but...

I have invested numerous lump sums in to AMC. I set up a RI in my DD CTF. The result, using my numerous years of experience, skills, knowledge, yada, yada..... Her average price 3p.... mine 5p. Go figure.

bowlhead99

cloud_dog wrote: »

I posted this on another thread (a little while ago) but...

I have invested numerous lump sums in to AMC. I set up a RI in my DD CTF. The result, using my numerous years of experience, skills, knowledge, yada, yada..... Her average price 3p.... mine 5p. Go figure.

Without stopping to ask you to explain what AMC, RI, DD or CTF are, which may mean next to nothing to newbies on a thread designed to help them... I assume you're saying that you invested money in various unstructured lumps into an investment product and over time had an average buy price of 5p, while someone else had a more structured drip feed approach and achieved a buy price of 3p. Presumably the price of the asset did not perform very well and fell to lower levels on average for the person doing the drip feed.

We don't really need to go figure it out, because it's not unexpected that one method of timing could beat the other, the point is just that investing larger and earlier works best on average across a large amount of actual historic data because markets go up over time.

The investment platforms that run features on 'the power of pound cost averaging' always like to use examples of "hey, sign up with us and commit to giving us money month in month out, and start checking your account quite frequently so you never forget us and are a great long term customer for us, even if things go wrong you can make more money than if you had invested the lot today! Better returns for lower risk! How awesome!". Because, doesn't that sound less scary than "gimme your life savings and take a punt".

They never show the mathematically more likely and historically more accurate depiction whereby committing to the monthly plan results in a generally higher investment cost and only gives returns equivalent to investing some money and keeping some money in the bank, because that is what you are actually doing. You are "buying an insurance policy against the investment going down", by not actually buying the investment! And if you don't buy the investment, then, generally speaking, you can't get the returns.

It's true there are psychological issues at work and someone investing a lump before a big dip might be tempted to pull out for a large loss and be put off investing, which is a poor result. But these 'intangibles' such as the power of psychology over maths, should be countered with education. For example, if you want to invest your money but are nervous about market direction... Then don't invest 50% in an incredibly risky equity fund and put the other 50% in a zero risk bank account for safekeeping. Simply make your investment into a lower risk fund, and then you don't risk the same percentage losses and don't have to hold back your money in cash while the fund goes up without you.

cloud_dog

bowlhead99 wrote: »

For example, if you want to invest your money but are nervous about market direction... Then don't invest 50% in an incredibly risky equity fund and put the other 50% in a zero risk bank account for safekeeping. Simply make your investment into a lower risk fund, and then you don't risk the same percentage losses and don't have to hold back your money in cash while the fund goes up without you.

You sum it up very succinctly and then completely miss the point (which I don't think you do, having trawled through a number of your essays)..

bowlhead99

I thought your point was that despite the maths saying it is better to invest a lump sum - on average, because there are of course outliers where regular investing 'beat' some unspecified number of lumps, per your example - the psychology could not be ignored, which meant that some people might prefer to not make their big risky investment all in one go.

And my comment was the psychology which prevents a person investing in the most mathematically sound way could perhaps be overcome with education, in the same way that other psychological weaknesses can be overcome.

After selecting a risky investment, you are advocating dripping money into it over time so that at the beginning you have none of these risky investments and 100% cash, and at the end you are 100% invested in the risky investments and 0% cash, so that on average for the period you are 50% in a risky investment and 50% in cash. On the day after your last deposit, the market could still tank, and you still lose a large amount of value on paper, because that's how risky investments work.

But investments are not binary on/off, 1/0, high risk/no risk. They are a range, a graduated scale. So, if you don't like the idea of being able to lose money on a risky investment, don't decide to blindly go ahead and buy the risky investment anyway by dripping into it, keeping most of your cash out of it for as long as possible because you really don't like the risk. Simply, buy a different investment!

The solution to the psychological problems seems to be education. Invest for as long as possible the amount of money you can afford to invest over the long term, in a product that has risks that you can stand. If you have £10000 to invest for a decade or two then if you invest all at once, the market will probably have gone up by the time the decade or two has happened. However, if you drip feed the £10,000 at £500 or £1000 a year for ten or twenty years, then on average your money will have only been invested for five to ten years ... some of the money has only been invested for a matter of months or weeks. Five to ten years may not even be a full economic cycle and the performance you are hoping for may not materialise.

So, I think it is an education issue and some people will be able to overcome their psychological weaknesses through education (e.g. my sister is no longer scared of spiders). Clearly some people will not be bothered getting the mental 'upgrade' needed. But as you say, I am completely missing the point. So, remind me, what is the point?

N1AK

bigfreddiel wrote: »

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

This is nonsense, and it is trivially easy to prove it is. Yes, on average you will be better off investing a lump sump immediately, but at the risk of losing out considerably if you go all in at a peak.

For example, someone who invested a £10k lump sum in the FTSE100 in May 2008 would have bought at 6,100. Someone who drip fed it in over a year would have bought at an average below 5,000. Given the time involved dividends etc would be negligible, leaving the drip feeder 20% better off.

Could you please show us the research that claims to show that investing a lump sum at the worst possible moments still beats drip feeding?

cloud_dog

bowlhead99 wrote: »

I thought your point was that despite the maths saying it is better to invest a lump sum - on average, because there are of course outliers where regular investing 'beat' some unspecified number of lumps, per your example - the psychology could not be ignored, which meant that some people might prefer to not make their big risky investment all in one go.

Firstly, as I mentioned in my very first words... 'it's horses for courses'. The reason I say that is because circumstances dictate some peoples action, or their ability to act. Next comes the psychology which you cannot ignore. In the real world it is a fact of life. Even if someone choses to save monthly until they have a lump sum you are then in this world of 'when' should I invest.

Also...unsure where big risky investments comes in to all of this? We are talking 'investing'. It's not something I've mentioned.

bowlhead99 wrote: »

And my comment was the psychology which prevents a person investing in the most mathematically sound way could perhaps be overcome with education, in the same way that other psychological weaknesses can be overcome.

Yes, because everyone is the same and everyone has the ability to overcome anything. It's fine on paper but not in the real world.

bowlhead99 wrote: »

After selecting a risky investment, you are advocating dripping money into it over time so that at the beginning you have none of these risky investments and 100% cash, and at the end you are 100% invested in the risky investments and 0% cash, so that on average for the period you are 50% in a risky investment and 50% in cash. On the day after your last deposit, the market could still tank, and you still lose a large amount of value on paper, because that's how risky investments work.

Your continual reference to 'risky' is this generic or specific?

Either way, what is your point? You invest £10k in one go or you invest £10k over a period of time. The markets crash your £10k single investment becomes £5k, your regular investment £10k (cost) becomes either £6k or £4k (depending on the prevailing market(s). BUT, referring back to my psychological consideration at least you will have been invested as opposed to possibly not.

bowlhead99 wrote: »

But investments are not binary on/off, 1/0, high risk/no risk. They are a range, a graduated scale. So, if you don't like the idea of being able to lose money on a risky investment, don't decide to blindly go ahead and buy the risky investment anyway by dripping into it, keeping most of your cash out of it for as long as possible because you really don't like the risk. Simply, buy a different investment!

You're missing the point. It's not about risk profiles of investments, it's about investing.

bowlhead99 wrote: »

The solution to the psychological problems seems to be education. Invest for as long as possible the amount of money you can afford to invest over the long term, in a product that has risks that you can stand. If you have £10000 to invest for a decade or two then if you invest all at once, the market will probably have gone up by the time the decade or two has happened. However, if you drip feed the £10,000 at £500 or £1000 a year for ten or twenty years, then on average your money will have only been invested for five to ten years ... some of the money has only been invested for a matter of months or weeks. Five to ten years may not even be a full economic cycle and the performance you are hoping for may not materialise.

Thats just an unrealistic, meaningless example.

If you had said....you invest £10k for 10 years a) by single investment b) by £500 per month for 20 months; that is a more realistic scenario. And, one where the variation is likely to be relatively small (depending on market fluctuations over the period)

bowlhead99 wrote: »

So, I think it is an education issue and some people will be able to overcome their psychological weaknesses through education (e.g. my sister is no longer scared of spiders). Clearly some people will not be bothered getting the mental 'upgrade' needed.

So, we just throw these people on the financial scrap heap?

bowlhead99 wrote: »

But as you say, I am completely missing the point.

Yes you are,again.

bowlhead99 wrote: »

So, remind me, what is the point?

Perhaps not everyone is as esoteric as yourself. Perhaps some people don't get it. Perhaps some people will never get it. Perhaps some people are unable to get it. Perhaps you'll get it?

cloud_dog

Rather than these novels, I should have simply summed up my point....

Some people are not and may never be comfortable making lump sum investments. Investing for the long term is positive and should be encouraged, and therefore using a regular investing method is nearly as good as the big bang approach.