Drip-Feed or Lump-sum?

capital0ne

I thought I would just bring this to the table again.
Which is better drip-feed or lump-sum,research has shown that a lump-sum approach works better than drip-feeding.
https://www.morningstar.co.uk/uk/news/197434/drip-feeding-vs-lump-sum-investing.aspx?ut=2

From the above article it sums it up like this:

The fundamental problem with pound-cost averaging is that it’s a market-timing strategy. Holding money back and then investing it later only makes sense if you believe the prices of the assets you are planning to buy will fall for a while and then eventually rise. As it is unlikely that many investors are making such forecasts, then a drip-feeding strategy may not be the best choice.

I used a monthly investment approach many years ago, but as soon as I could afford to do a lump-sum method I maxed out my ISA on day one of each new tax year - I couldn't see why anyone would waste a years worth of tax free growth and dividend income. :T:T:T

bowlhead99

capital0ne wrote: »

Which is better drip-feed or lump-sum,research has shown that a lump-sum approach works better than drip-feeding.

If the goal is to invest your money because investment markets go up over time (which is why you are planning to invest at all) then in stands to reason that if you average together all possible results it will have on average have been better to deploy the money into investments earlier rather than later.

As a consequence, a method that causes you to invest slowly while holding back cash and only gradually convert your cash into investments, is not going to produce a return as high as a method that causes you to buy the higher returning investment portfolio earlier. So without reading the article, it is not a surprising conclusion.

From the above article it sums it up like this:

The fundamental problem with pound-cost averaging is that it’s a market-timing strategy. Holding money back and then investing it later only makes sense if you believe the prices of the assets you are planning to buy will fall for a while and then eventually rise. As it is unlikely that many investors are making such forecasts, then a drip-feeding strategy may not be the best choice.

Generally it makes sense to simply invest your spare money as soon as you have it available (e.g. each month from employment income) and get it into the investment markets, rather than try to guess how to avoid the peak and catch the trough of market movements.

However, someone who suddenly receives a lump sum windfall may understandably be nervous about committing that to the investment markets in one fell swoop, as to do so right before a large market downturn could cause a great deal of regret and may cause them to do something damaging to their wealth (like dump the investments in fear, having not ever previously had experience of suffering a significant drop in wealth - which causes them to miss the recovery).

So an investor who does not know whether to invest sooner or later, may prefer to split their lump sum and invest both sooner and later and in the middle. Alternatively they could just position themselves in lower risk investments, instead of using that dripfeed mix of high risk invesments and cash.

The investment firms that show you 'the power of pound cost averaging' as being something that can make it possible to make a positive return even when markets are fluctuating, are trying to do a few things with their 'educational' messaging, including

(a) make investors less nervous about entrusting their hard earned savings to the investment firm by showing that you should embrace volatility rather than be scared of it, and not mind if markets go down;
(b) drive home the message that investing affordable monthly amounts over a long period can produce great returns even in choppy markets, and you don't need to wait until you have first built up a large lump sum before you come to the investment firm with your money.

It's easier to convince investors to sign up to a monthly subscription / direct debit for an affordable monthly amount than commit their life savings all at once, and the supposed 'magic' of drip feeding can help to convert a wavering non-customer into a customer.

I used a monthly investment approach many years ago, but as soon as I could afford to do a lump-sum method I maxed out my ISA on day one of each new tax year - I couldn't see why anyone would waste a years worth of tax free growth and dividend income.

So you're basically doing a drip feed method by investing your money on 6 April every year and obtaining an average of buy prices over the decade. Much as someone else might do a drip feed method and invest once per week or once per month or once per quarter and obtain an average of buy prices over the decade. Yours is just a less-smooth average because your drips are less frequent.

If you were really embracing the point of the article you wouldn't wait with £20k sitting on the sidelines ready to invest it when the calendar ticked round to 6 April. You would have already invested it when it became available to you, and got the proper benefit of investing the lump sum earlier. Then on 6 April you would simply flip it from an unwrapped general investment account into an ISA account and continue the investment journey that you had already started.

If you're instead holding off in cash until 6 April and only then investing it to 'get a full year of growth and dividends' you seem to be missing a trick, which is to invest it as soon as you have the money available and thereby get more than a full year of growth and dividends - the latter year being tax free but the earlier period prior to it going into an ISA still likely to (on average) produce a superior return to cash.

Notepad_Phil

At the very end the paper says

The fundamental problem with pound-cost averaging is that it’s a market-timing strategy. Holding money back and then investing it later only makes sense if you believe the prices of the assets you are planning to buy will fall for a while and then eventually rise. As it is unlikely that many investors are making such forecasts, then a drip-feeding strategy may not be the best choice.

But I don't believe that the main reason that people choose to pound-cost average is that "you believe the prices of the assets ... will fall for a while ..." instead I'd be more inclined that "you are worried the prices of the assets ... will fall possibly for quite a while ..." - hence the pound-cost averaging messages reassure those people that there is a benefit to falling markets and that they won't lose a big chunk at once.

Yes the pure maths would say that putting it all into the market at once is the way to go, but when has the market ever worked just on pure maths

talexuser

I've maxed the ISA on April 6th for many years, been lucky so far without a major crash just afterwards often. If there was, it is just possible the extra growth from all the previous early investment might just make you still ahead after the recovery. At the end of the day if you think the market is going to fall soon, why invest? But if you are beginning on your investment journey there is nothing wrong with the comfort blanket of knowing you may be buying low some of the time, and your whole pot is not going to fall immediately.

Albermarle

Then on 6 April you would simply flip it from an unwrapped general investment account into an ISA account

Is there not an admin issue here, because as soon as you start investing in an unwrapped account then you have to start keeping records about capital Gains and dividend payments etc
Probably not an issue for an experienced investor but possibly best avoided for most of us ?

Prism

Drip feeding is best for most people as that's how they get paid. Why wait until April to invest

eskbanker

Prism wrote: »

Drip feeding is best for most people as that's how they get paid. Why wait until April to invest

That's potentially muddling the two different scenarios under consideration here:

If you have a lump sum to start with then on average it'll work better to invest it immediately rather than drip-feeding.

If you don't have a lump sum to start with then on average drip-feeding is a better option than saving up a lump sum to invest in one go later on.

Or as bowlhead99 put it earlier, the optimal strategy (mathematically) is typically to invest it as soon as you have it....

capital0ne

Prism wrote: »

Drip feeding is best for most people as that's how they get paid. Why wait until April to invest

Like I said I max out my ISA so I can't invest in it anymore till following April!

capital0ne

Albermarle wrote: »

Is there not an admin issue here, because as soon as you start investing in an unwrapped account then you have to start keeping records about capital Gains and dividend payments etc
Probably not an issue for an experienced investor but possibly best avoided for most of us ?

The chances of having a CGT bill on the sale of £20k worth investments to then shelter in an ISA is very low.

Prism

capital0ne wrote: »

Like I said I max out my ISA so I can't invest in it anymore till following April!

So you don't invest anything more after April? If not why not?

Prism

eskbanker wrote: »

If you have a lump sum to start with then on average it'll work better to invest it immediately rather than drip-feeding.

If you don't have a lump sum to start with then on average drip-feeding is a better option than saving up a lump sum to invest in one go later on.

Agreed, though CapitalOne makes it sound like they are purposely holding back 20k until April each year so they can invest in a lump sum. Drip feeding would surely be more efficient