Should I top-up my investment when the price is rising?

Important information -  the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Q: “Should I add money to a fund I already invest in, if the unit price is rising — or should I wait until the price drops to buy?” 

A: This question taps into a common investment dilemma: should you automatically back your winners or wait for a more opportune time to avoid buying at the top of the market?

In many ways, this is a nice problem to have — it means you’ve chosen your investment well and it’s performing as you’d hoped.

Sadly, none of us has a crystal ball to accurately predict future market movements, so there is no simple ‘yes’ or ‘no’ answer to this question. If you invest more and the fund continues to steam ahead, you’ll be glad you had faith in your original decision and weren’t left sitting on the sidelines as prices rose. But if you invest and prices fall back in the near future, you’ll no doubt be wishing you’d had a little more patience.

All of this highlights the impossibility, and inherent risk, of trying to time the market.

One way to take the stress and emotion out of such decisions is to drip-feed money into your investments on a regular basis. This approach, known as pound-cost averaging, can help smooth out the impact of normal market volatility. Fidelity’s investment director Tom Stevenson is an advocate of this approach, particularly for longer-term investors, pointing out that it can help calm nerves during periods of market turbulence, such as we’ve seen in recent months.

But while many people invest regularly, from time to time we may have additional cash to invest — and funds that have performed well can seem an obvious home for that money. And this age-old question on backing winners will rise again.

Putting the question of market timing aside, there are a few other considerations to bear in mind, which may help you make your decision.

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First, consider why you bought this fund in the first place. Did you believe there were particular opportunities in a certain sector or country, for example — and is that still the case? It can also help to assess why the fund has risen in value recently. If there’s a strong investment case behind its performance, that might give you confidence to invest more. But if you can’t fully explain the rise, or it seems speculative or sudden, perhaps caution is advised.

You should never make investment decisions in isolation. Review your broader portfolio to ensure it remains adequately diversified. Concentrating too much money in a single fund or sector increases risk, so bear this in mind when topping up existing holdings.

One way to manage this is by setting thresholds. These self-imposed rules can prompt you to rebalance your investments when certain assets or funds exceed a set proportion of your portfolio. Remember, if a fund has done well, it may already be taking up a larger share of your investments.

It’s also helpful to periodically review your overall investment strategy — for example, your specific goals, time horizon, and risk tolerance. Make sure any new investment decisions align with this broader plan.

If you’ve got a burning question you want to ask, why not drop us a line. Ask us your question.

• Read: Principles for good investing
• Read: Is my portfolio diversified enough? 
• Read: Six habits of successful investors (and how to form them)