Which is better: lump sum or regular investing?
An early bird strategy wins... most of the time.
Is it better to invest regularly, or plough all your money into the market as soon as you can? The Association of Investment Companies (AIC) has looked at the impact of investing a £20,000 ISA allowance at the start of the tax year, the end of the tax year, or split into regular monthly amounts throughout the year1.
Over the past ten years, an “early bird” strategy of investing £20,000 on the first day of the tax year in the average investment trust would have led to a return of £314,455 by 5 April 20242.
Had you split that £20,000 into 12 monthly contributions of £1,666.67, investing each on the 6th of the month, your investment would have been worth £296,183, 6% less than if you had invested on the first day of each tax year.
But if you had left it till the last minute, investing £20,000 on the last day of each tax year, you would have made just £288,902, 8% less than the early bird strategy.
Source: theaic.co.uk / Morningstar
However, the early bird strategy doesn’t work best all the time. Taking each tax year separately, there are two years out of the last ten in which it would have been better to invest monthly: 2015/16 and 2022/23.
In the 2015/16 tax year, stock markets fell in the summer as the Greek government defaulted on its debt – allowing regular savers to purchase cheaper shares during and after the market falls. The early bird would have seen a return of £19,182 on the original £20,000 investment, while the regular monthly saver would have beaten that by £387, with a final investment value of £19,569 on 5 April 2016.
In 2022/23, the difference is starker. The average investment trust lost money in eight out of 12 months of the year as markets tumbled due to rising interest rates and concerns about out-of-control inflation. The early bird would have been left with £17,838 from a £20,000 investment, while the regular saver would have £1,477 more with £19,315.
The chart below shows by how much the early bird beat the regular monthly saver each tax year. Negative numbers indicate that the regular saver performed better that year.
Source: theaic.co.uk / Morningstar. TY = tax year
“If you can invest early, the data suggests that it’s usually better to do so. The average investment trust has made money in 78 months out of the last 120, about two-thirds of the time. So the chances are that being invested for longer will pay off.”
Nick Britton, Research Director of the Association of Investment Companies (AIC)
Nick Britton, Research Director of the Association of Investment Companies (AIC), said: “Regular monthly saving is a great habit to get into, as it removes the stress of wondering when to commit money to markets. It’s also practical for most people, who don’t have large lump sums lying around.
“However, if you can invest early, the data suggests that it’s usually better to do so. The average investment trust has made money in 78 months out of the last 120, about two-thirds of the time. So the chances are that being invested for longer will pay off.
“Those of a more nervous disposition might still prefer to drip feed money into the markets, even if it won’t leave them better off in most cases. That’s because there is always the risk of investing a large amount of money just before a big market fall.
“Whatever you do, the main point to remember is that investing earlier and for longer really pays off over the long term – so don’t leave it too late to get started.”
- ENDS -
Follow us on X @AICPRESS
Notes to editors
- The ISA allowance was increased to £20,000 starting from the 2017/18 tax year. For simplicity, a hypothetical ISA allowance of £20,000 has been used for each of the last ten tax years from 2014/15 to 2023/24.
- Source: theaic.co.uk / Morningstar. Average investment trust return is share price total return excluding VCTs.
- The Association of Investment Companies (AIC) represents a broad range of investment trusts and VCTs, collectively known as investment companies. The AIC’s vision is for closed-ended investment companies to be understood and considered by every investor. The AIC has 330 members and the industry has total assets of approximately £273 billion.
- For more information about the AIC and investment trusts, visit the AIC’s website.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
- To stop receiving AIC press releases, please contact the communications team.
