Not too long ago I opened my first ISA, dipping my toe into the wide world of investing but now it is time for me to take the next step – moving more of my money into the market.
I had been hesitant to invest all of my savings due to the fact that I had never invested before, leaving half of what I had intended to invest sitting in the account as cash, doing nothing.
From time to time, when my funds have been down by some percentage points, I’ve bought more with my leftover liquidity, an approach sometimes referred to as drip-feeding.
But having realised that it’s going to take some time before I’ll have drip fed the whole sum, I started questioning whether this is the right approach for me.
Below, I have asked three experts how to approach drip-feeding, when it makes sense, and when it doesn’t.
Simon Evan-Cook, manager of the recently launched Downing Fox multi-asset range, has recently been in the same situation (albeit on a much bigger scale).
“I had a lot of money invested in other funds and in cash because the new funds were all queued up waiting to launch and literally as of a week ago, I put all of that into our 100% equity fund. I am now fully in the market and for me personally, that makes sense, but you can't give blanket advice” he said.
“If you’re able to put all your money in the market now and only come back in 10 years’ time, you'll be very pleasantly surprised if you put that into equities now. But more nervous investors would be alarmed if they’d put all their money in and in the next three months equities are up or down 20%. So it’s an investor's decision depending on their personality, or it's between the advisor and the investor.”
Because I’m not in my eighties, I have some leeway to deal with a loss, so in theory it would make sense to put all my money in now. But because so far I haven’t done so, Kim Barrett, chartered financial planner at Barretts Financial Solutions, suggested my lack of a gung-ho approach was a sign I have more of a cautious disposition and therefore said I should consider drip feeding the money in.
“Investing a whole chunk of cash today, with the current volatility of the markets, would be an adventurous play. If you don’t want to be that adventurous, there are some very good cash rates out there,” he said.
Instant access cash accounts are offering north of 4%, as we recently reported on Trustnet. But with inflation surpassing the 8% mark, I’d be making a certain loss.
“That’s true. But then, no one out there could guarantee you an investment return of around 8% at the moment. It’s just not possible,” said Barrett.
“Anyone advising about investing money has got to be looking at a potential loss of purchasing power with these levels of inflation.”
James Corcoran, senior chartered financial adviser at Lumin Wealth, was a bit more optimistic about the market and noted how, statistically, there are more good days than bad and in normal market circumstances there is more chance that drip-feeding will mean missing out on growth.
But, he said, it will also allow you to take advantage of pound cost averaging, potentially lowering the overall purchase price, and if the market does drop, then at least you’d have the benefit of buying units at a lower price.
“In typical market conditions – and when investing in managed funds – I would tend to favour just getting the funds invested as quickly as possible, unless there is something very significant happening in the market,” he said.
“If you are looking to invest in higher-risk options, such as individual equities, then you should carefully consider the specific circumstances relevant to the company whose shares you are buying.”
However, if you are going to drip-feed cash in, Corcoran said it is important to define a consistent investment plan, such as buying a fixed amount monthly by setting a regular standing order.
“This method reduces emotional decision-making based on short-term market fluctuations, which can prove to be very costly. By setting a recurring investment schedule you can navigate market volatility and take advantage of potential cost-averaging benefits.”
Barrett, after making sure I wasn’t going to splash £100,000 into the market each month (I wish), said that it’s not that important when you decide to make your payments.
“None of us know when is the right time to go in. Equally dripping in a regular amount on a set day each month is no worse than doing it on a random basis, because neither of them will react to the ability to know when the markets are going to go up.”
Because my portfolio is far from complete, I like the idea of having some spare cash to enter new positions should the opportunity emerge at some point down the line. I’ll probably keep drip-feeding my money for now, but perhaps with bigger amounts each time.