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Drip feed investing or tactical?
Comments
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But would pound cost averaging not be a good start for a person new to investing?It may miss gains in a rising market but if the market drops they are buying more and hopefully it gets them used to the idea of investing.
I know it might be hard for a beginner to deal with losses,but rather than waiting to invest they should invest in a portfolio that is appropriate for their risk tolerance. The most critical thing about investing is how you managed the money through both ups and downs. This is why I like multi-asset funds that automatically rebalance if you are a beginner.“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
bostonerimus - I definitely want to invest over the next three years incrementally, but I'm not sure if I'll have more than a lump sum of about 24-28k to put in (might have to put my income towards something else). Best to do what I suggest above to Eskbanker? Lump sum and then small investments?
The priority with your income should be pension contributions (after a roof over your head and food of course) because you get a big tax advantage and also employer contributions.“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
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No, I'm saying that if you already have a £10K lump sum available to invest then on average it'll be better to invest it all immediately rather than drip-feeding.eskbanker - are you saying that if I had 10k to drip feed in it would be better to put in a lump sum of, say, 2k and then drip feed the rest at like £500 quid per month?0 -
[FONT=Verdana, sans-serif]Download a copy of the FTSE100 daily index for say the last 10-15 years and you can plot whether your approach would be better than say investing every 1st of the month.
[/FONT] [FONT=Verdana, sans-serif]I did once look at this strategy a few years ago. I think I looked to see if investing when the index had dropped 3 days in a row would pay off.
[/FONT] [FONT=Verdana, sans-serif]From memory I don't think I found a reliable formula worth following.[/FONT]0 -
Be careful if you are doing that, because the 'FTSE100 daily index' published in the mainstream media is an index of the capital value of the FTSE100 constituents.[FONT=Verdana, sans-serif]Download a copy of the FTSE100 daily index for say the last 10-15 years and you can plot whether your approach would be better than say investing every 1st of the month.[/FONT]
What you need to look at is the total return of the index, including dividends paid. Dividend yield paid by FTSE100 members in the year to last November were 3.95% of the value of the index (http://www.ftse.com/Analytics/FactSheets/Home/DownloadSingleIssue?openfile=open&issueName=UKX&isManual=False). If you were invested in the FTSE100, as an example, the issue is not just whether you bought in at a cheaper or more expensive price, but whether you would have missed dividends which could have been reinvested - as Thrugelmir notes above.
But there is no real need to pull out all the daily statistics for the last x years and run a simulation of what would happen if you invested a lump at the start vs monthly, over decently-long time periods. People have already done that for you over datasets spanning multiple decades and come up with the common-sense answer that the whole reason you want the investment is because it is likely to deliver better returns than cash, and therefore the longer your cash is at work, the better, and therefore in the majority of observed time periods, it has been better to invest via lump vs via drip feed.
That is what 'the average' tells us, and as we don't know the future we can only work on averages. We can of course also take note of what is the worst potential peak-to-trough 'drawdown' by investing a lump sum at the top of the market, following the market down and then selling out. For example, the FTSE All-World index (100% global equities) the biggest drawdown in the 10 years to last 30 November 2017 was 57% in US dollar terms (http://www.ftse.com/Analytics/FactSheets/Home/DownloadSingleIssue/GAE?issueName=AWORLDS). In the 10 years to last 31 October 2017 it was higher, at around 58%.
If you happen to 'buy at the top' with a lump sum, you are not planning to sell out when it hits bottom a year or two later anyway, so you are not actually going to 'lose' the 58% (or the smaller loss you would see on your diversified portfolio that isn't fully equities). But it's clear that it's better to buy at the bottom than the top. Your problem is that you don't *know* it will be cheaper to defer your purchase. If you actually think it is going to be a lot cheaper to buy later, and are confident about that, then it wouldn't make any sense to buy at all now. Yet your research tells you that investing is a good thing to do. On balance, you will probably not beat the system by following personal hunches.
As Boston suggests, new money will likely come available to you over time and so that will give a natural 'drip feed' even if the chunks of investments are months or years apart instead of every single month. If you are 'scared off' by the chance of a fall in value of your money, then simply invest in a less-volatile investment which is within your risk tolerance.
If you know you definitiely do want your (e.g.) £10k to ultimately be invested in an 70% equities portfolio (75% VLS60 and 25% other equities)... then it is a little strange to decide to have month 1 be 20% in your desired portfolio and 80% not in your desired portfolio, and then month 2 be 25% in your desired portfolio and 75% still not in your desired portfolio, and month 3 be 30% in your desired portfolio and 70% still uninvested and so on. You are basically saying I am looking to use a long painfully drawn-out process to move myself into a medium-high risk portfolio. And then a year from now, just as I finish my drip-feed, the market could decide to start a receessionary crash period so I still lose a big percentage of my money but I have made all my investments at higher prices than if I just bought today.
If it is the immediacy of getting a medium-high risk portfolio overnight that scares you, then why not consider a lower risk portfolio.
Of course, it is something that everyone has to come to terms with in their own way. The key thing you have already identified from your reading and research is that over the long long term it is clearly going to be better to be invested as an investor than stuck in cash as a saver. So whatever best works for you to get comfortable with being invested instead of being in cash forever, is the best route.0 -
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Nobody has mentioned Inc vs Acc because that has nothing significant to do with whether it is better to use a lump sum or drip feed.
The chap from Eskbank is just suggesting that if you have £10k to hand already it is better to invest it right now instead of drip feeding; and if you don't have £10k to hand then just invest what you can when you can.
In other words invest your money as soon as possible to spend longer time invested in the market ; statistically that will give you the greatest chance of getting the expected long-term return from the market, because your money will be in the market for the longest term. It is common sense really.
The 'drip feed' approach is something that 'eases you in' to the idea of investing by holding back money in cash so that you are not fully invested and therefore you are taking lower risk. The tradeoff of course is usually getting lower returns.
However it is easier to convince a non-investor to become an investor by not trying to get them to commit their life savings all at once - psychologically difficult to do. It is generally easier to get someone to become an investor by telling them it is £x00 per month rather than £x0000 up front. By giving you exanples of how with certain types of market movements an investor may even benefit from future market low periods (by being able to buy fund units at low prices) and that you shouldn't fear market swings, the 'drip feed' is even more 'marketable' as a concept to a newbie investor. However, that's not to say drip feeding actually statisically produces a better result. On average, it produces a worse result because your average purchase price ends up being higher because on average, prices go up over the years.
But for many of us, with new money arriving over time through salary etc, drip feeding is naturally what happens.
In terms of Inc vs Acc (which eskbanker wasn't talking about
) ; Inc with dividends reinvested will broadly give a result the same as Acc, except the cashflows will be more visible to you so if you were investing outside an ISA or SIPP and had to do tax returns, it could be more convenient to use Inc and see those cashflowa instead of use Acc where dividends are reinvested without you seeing them. 0 -
You seem to be capable of reading between lines that aren't there! I wasn't making any comment about income versus accumulation variants of funds, or indeed anything about what anyone might choose to invest in, just reinforcing the message that, as long-term averages involve more growth periods than falling ones, investing at the earliest opportunity is the most obvious strategy rather than deferring.Are you putting forward an argument for income from the fund (VLS 60 inc) reinvested, over an accumulation fund?
Having said that, it's entirely up to the individual (and their objectives, etc) as to whether to use inc or acc versions of funds but using the former to emulate the latter (by routinely reinvesting) doesn't seem to make much sense to me!0 -
think what the OP has learned is that like the book some people like to drip feed but more on here like to put a lump sum in.But perhaps the best advice is from the people who said they should do what they feel comfortable with as this will all come down to hindsight in the end - a lump sum invested this week may buy 10,000 shares/units but over a year using drip feeding you could end up with 12,000 units and be happy or get 8,000 and not.But its making that choice and living with it0
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