Invest regularly

The theory

To maximise your long-term chances for investing success you'll probably need to keep investing - and stay invested - when the going gets tough. When our investments lose value, this can be hard as it's natural to want to sell or not to invest more. And yet a market dip can often be a good time to invest in the long run.

By investing regularly, you're less likely to try and time the market (something that even the experts find hard to do).

How it works in practice

This example is for illustrative purposes only. The value of investments can fall as well as rise, so you may get back less than you invest. Past performance is not a reliable indicator of future returns. The return shown here does not take account of charges which would reduce these amounts.

Take two investors. Harry attempts to time the market and manages to miss the 10 worst days in the market. Odine attempts to time the market but misses the 10 best days in the market.

By managing to avoid the worst days, Harry gets better returns. Odine, who missed the best days, does worse.

Ideally, you'd be like Harry and not Odine - but the chances are you won't be able to get the timing decision right on a consistent basis. That's why it might make sense to take a third option - simply stay invested and avoid the risk of getting your timing wrong. By taking this path, you don't have to worry about making the right decisions.  

The theory

One of the benefits of investing regularly is that it takes the emotion out of investing and puts your money to work - no matter what the market is doing.  It removes the temptation of trying to time the market. There are pros and cons to this.

If the market falls, investments don't cost as much and you'll get more for your money. When the market rises, the price of investments go up and you get less for your money. Over time the price you pay for your investments will average out. This is also known as pound cost averaging.

How it works in practice

The examples below are based on illustrative scenarios, not real market returns. Investment values can fall as well as rise and so outcomes can be different depending on market conditions. Charges would also apply and reduce any returns.

In each scenario, both investors have £12,000 to invest over the year. The difference is that one regularly invests £1,000 each month, while the other invests it all in one go. 

In a rising market (where investment prices go up and down over the year but end it higher) Dan will do better than Shandia. This is because he invested his whole £12,000 at the beginning of the year, when prices were at their lowest.  Dan makes £3,120 over the year, which is £2,038 more than Shandia.

In a flat market (where investment prices go up and down over the year but end up where they started) Trish does better by regularly investing £1,000 each month. This is because she bought investments at different prices which averaged out at a lower price than Andrew paid (so she gets more investments for her money). As a result, Trish’s investments are worth £1,977 more than Andrew’s by the end of the year.