Lump sum or regular investing: which is best?
Working out how much to invest and when to do so is something investors often agonise about just as much as where to put their money.
Should you invest a lump sum and hope you’ve timed it right, or drip-feed money in slowly every month so that you don’t have to try and predict stock market fluctuations?
The effect of euro-cost averaging
Euro-cost averaging involves investing a fixed amount of money on a regular basis. If you have managed to set aside €1,000 and are thinking about how to invest it in shares, you have two options:
Option 1: Lump sum investing
Lump sum of €1,000 to invest in a particular share
This would buy you 10 shares at €100 each
Assuming the share price recovered to €10 at the end of 10 months, your investment would be worth €1,000.
However, you would be fully exposed to the market, with the value of your investment rising or falling in line with share price changes.
Option 2: Regular investing
In our view, drip-feeding money into the market on a regular basis is a more sensible option, as it can help long-term investors to endure periods of market volatility.
Assuming the share price recovered to €10 at the end of 10 months, your 112 shares would be worth €1,120.
Of course, the reverse could happen. If share prices rose over the same period, your monthly investment would buy you fewer shares, leaving you worse off at the end.
Invest for the long term and stay diversified
Generally speaking, there will always be competing factors to consider that may impact the market environment and create volatility.
No asset class is going to win out all the time. By diversifying across multiple asset classes and returns, you should be suitably prepared for any market wobbles, whenever they arise.
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