Investing For growth: Drip-feed your funds to reduce your risk

Regular investment can help smooth the peaks and troughs of the market
Click to follow
Indy Lifestyle Online
REGULAR INVESTMENT is not only a good way to build up a portfolio from scratch, but it can also reduce your investment risk and help you benefit from any volatility in the stock market.

Given the gyrations of the market over the last 12 months, the benefits of regular investment have never been clearer. In the first half of last year it seemed like there was no stopping share prices.

By 20 July, the FTSE 100 index, which measures the share performance of the top 100 companies, had reached 6,179. Then the crisis which had hit overseas market hit the UK and share prices tumbled. By 5 October, the FTSE index had slumped to just 4,648, wiping around 25 per cent off the value of leading shares. Since then the market has recouped these earlier losses and currently is riding high - but for how long?

Surveys carried out among leading City experts show that many expect the stock market to fall back over the coming year. Nick Knight, of Nomura International, expects the FTSE 100 index to drift back to 5,800 by the end of the year while Kevin Adams, of Barclays Capital, thinks it will fall to around the 5,000 level.

Others are more optimistic. Jon Thornton, of Aberdeen Asset Management, predicts the FTSE 100 will trade "well above 6,000". While Peter Knapton, of Legal & General, expects the FTSE 100 to settle at around 6,300 at the end of the year.

What most people agree on is that the market will remain volatile, making choosing the right time to invest a tricky business. And this is where the regular savings route can pay dividends. By investing in a unit trust or investment trust on a regular basis you remove the risk of investing all your money when the market is most expensive, and you ensure that when the market falls you are buying into the fund cheaply.

Last year, if you had invested a lump sum in July you would have seen the value of your investment slashed by 25 per cent within a matter of months. Providing you did not sell up in a panic, you would probably be back to where you started. However, slumps such as the one we have just experienced are not always over so quickly.

In 1987, for example, the market crash lasted just a few days, but it took some funds a couple of years before they regained their pre-crash prices. If you had invested at the peak just before the market crashed, you would had had to wait a long time before recouping your losses.

By investing on a regular basis, rather than investing a lump sum, there is no danger of investing all your money when the market is at its peak. You also can benefit from market lows. For example, those people who invested in the stock market at the beginning of Octoberwill now be sitting on a healthy profit.

By drip-feeding money into an investment fund, you buy units in a unit trust or shares in an investment trust at the going rate. So when the market is low the units or shares are likely to be cheaper, so you get more for your money.

This process is known as pound-cost averaging, and reduces the chance of buying your investment at the wrong time. Of course, if you get your timing right you could make a killing, but even the professionals are not that good at predicting market falls and surges, so most people will want to avoid this, says James Higgins, of independent financial advisers, Chamberlain de Broe: "The benefit of regular premiums is that you are averaging out the volatility in the market. If you drip-feed money into a fund you will be buying both during the good times and the bad times. Regular premiums enable you to even out the peaks and troughs of the market," he says.

The more volatile or high risk the fund you invest in, the more important this becomes. If you are investing for the very long term in an emerging market fund (say a fund which invests in the Far East), you can expect a helter-skelter ride. Political, economic and currency crises are all common in these developing economies, and these funds can literally halve in value overnight.

However, a change of government or international economic help can boost these economies, and the value of funds can soar with prices doubling overnight.

Getting the investment timing right is often potluck. It is all too easy to think the fund has troughed only for it to halve in value again. For this reason, most experts recommend that if you are going to take on what is a high risk investment anyway, you look to limit this risk by investing on a regular basis, or staggering your investment rather than investing all your lump sum in one go.