Lump sum vs monthly payments: what's best for investing?

Michelle McGagh
hand giving a golden coin to a...
hand giving a golden coin to a...

If you've decided to make your cash savings work harder and plan to invest your money, the way you feed your money into investments can make a big difference.

Investors need to make a decision on whether they want to invest all their money at once or drip feed it into investments over time.

Investing a lump of money all at once comes with affordability issues, in other words do you have the cash to hand. You also have to be confident about the investment choices you are making in order to commit your cash.

For many though, investing a large sum of money just isn't feasible and most people will need to build up their investments with smaller sums over time. Of course, some investment will require a minimum investment which means you may have to save up in order to invest in certain funds.

There is no right or wrong way to invest your money. However, putting in a lump sum at the beginning of your investment journey means more of your money will have the opportunity to benefit from stock market growth, although more of it will also be at risk of a downturn.

By investing monthly, only your early investments get the full benefit of stock market growth on all your money, although not as much is lost if the stock market falls.

Smoothing returns

One benefit of investing regularly is a process known as 'pound cost averaging'. Typically an investor puts in the same amount each month to "smooth out" the movements in the stock market, said Charles Stanley head of investment research Ben Yearsley.

Through investing smaller sums regularly, investors can dip their toe into investment waters and they are averaging out the cost of buying investments, such as units in a fund or company shares.

By investing at different times you are purchasing assets at different prices, which is the nature of stock markets – the prices go up and down – rather than purchasing your investments at one price.

The theory is that some assets will be more expensive and some will be cheaper over the years of investing, but the cost will average out. Depending on how stock markets fare you could even be better off as exposure to falling markets is more limited than investing a lump sum.

"The assumption is that people have a lump sum and most do not – monthly saving is the only option," said Yearsley.

"Over the long term – 10, 15 or 20 years – you will get a better return if you put all your money in at the start but [investing monthly] means pound cost averaging smoothes the road."

By setting up monthly investments, investors may not only benefit from pound cost averaging but they will also get into a good saving habit of putting a little bit by each month.

Yearsley said it did not matter how much was invested each month, just that it was a regular sum that was affordable.

"[The best sum to save] is whatever you can comfortably afford," he said. "That means if something happens you do not have to stop investing because you have run out of money. If you can afford £50 a month over 10 years, that won't make you a millionaire, but it will build a nice pot..'

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