The importance of regular savings

Investment professionals have their share of old wives’ tales. The classic is the longstanding stock market adage, “Sell in May and go away”. The idea behind this oft-repeated saying is that markets will tend to underperform in the summer months, though no-one seems to have any idea why that should be. And the truth is that, while there have been summers when share prices have disappointed, there have also been plenty of periods when performance has been strong at this time of year – anyone who followed the adage missed out on these.

This summer was a good example, as figures published recently by the Association of Investment Companies demonstrate very clearly. By the end of August, the average investment company had made a return of around 5 per cent since the beginning of the year, the AIC reports. Of that, 4 per cent had been delivered since the end of April. In other words, anyone who followed the ‘Sell in May’ dictum would have missed out on four-fifths of this year’s stock market gains over the first eight months of the year.

Don’t time the markets

The broader lesson here is an important one for investors. It is never a good idea to try to time stock market investment in this way. Anyone who thinks they can call the top or bottom of a particular market is in for a nasty shock – the number of times you’ll get it right will be hugely outnumbered by your costly mistakes.

In fact, the best way to invest in the stock market is to focus on the reason you allocated your money to this asset class in the first place. Equity investment makes sense for people who are able to take the long-term view – because while share prices can be very volatile in the short term, falling as well as rising, in the past at least they have usually generated better returns over longer periods.

To put it simply, buy and hold is the way to go. You stand a much better chance of achieving good investment performance if you make sensible decisions and then stick with them, rather than trying to dip in and out of the markets.

Why regular savings matter

Even better, consider the regular savings schemes that many investment companies offer. These allow you to drip-feed money into the markets on a monthly basis, so that you’re constantly topping up your investment.

Regular saving is effective thanks to a feature known as ‘pound-cost averaging’. The principle of this is that, in months when your investment company’s share price is lower, because it has fallen in value, your fixed regular investment will buy more shares. Once the price recovers, you’ll get an additional boost.

The investment company sector pioneered the regular savings scheme and these plans are as valuable to investors today as they have always been. It’s not just the discipline of monthly saving that’s important, though this is useful too, but also the way in which regular savings schemes offer you an ongoing, long-term route into the markets.

Forget “Sell in May” – the more appropriate advice is “Buy in May – and every other month”. It’s not so catchy admittedly, but it’s a far more lucrative strategy.