Regular savings plans - the drip-feed approach to investing in the stock markets - are supposedly the panacea for financial ills. The idea is that you invest a fixed sum each month - pounds 50, say - into a personal equity plan (PEP), unit or investment trust, personal pension or endowment policy. The sums going out are sufficiently small not to be noticed, but they can build up surprisingly quickly. Furthermore, because you are putting in money each month, you do not have to worry about investing everything just before a crash.
Emma Weiss, a spokeswoman for the Association of Unit Trusts and Investment Funds, says: "As well as the accessibility to stock market investment that regular saving gives you, by drip-feeding money into your fund you avoid the issue of market timing."
Regular saving does have its downside, however. Over the long term, stock markets tend to rise in value, so it makes sense to have as much money invested for as long as possible. Assuming that there is not a severe market downturn, you should not be looking to release funds quickly.
Regular savers must also face up to the question of charges. Index-tracking fund managers are still engaged in a price war which has enabled some investors to pick up excellent deals on PEPs. But regular savers don't always get such a good deal.
Take Gartmore and Virgin, two contenders in the index fund price war. Neither fund manager makes an initial charge and both levy a super-competitive annual charge of just 1 per cent if you hold the funds in a PEP. However, for investors who make monthly payments into either PEP, charges will rise considerably. That is because both managers charge a flat fee of pounds 2 on each of the monthly contributions, on top of the annual charge (to get Virgin to waive the fee, you first have to invest a pounds l,000 lump sum).
In other words, an investor who makes 12 pounds 50 monthly payments in to Gartmore's or Virgin's index-tracking PEP actually pays total charges of 5 per cent a year. That's much more than the bargain- basement 1 per cent so often quoted. A Virgin spokesman says: "The pounds 2 fee is there to cover the costs of collecting the direct debits." He admits that the fee increases the charges.
The extra charge is particularly damaging to small investors. Since both managers charge a flat fee, the smaller your investment, the larger the impact of the charge. Painful, when you consider that less affluent investors are more likely to have to opt for regular savings since they do not have big, lump sums to invest.
Charges can also hit regular savers hard when it comes to personal pensions. Some insurance companies will still penalise investors who vary the amount of money they pay each month. And many penalise investors who stop contributing for a period, perhaps because of the loss of a job.
None of this is to say that regular savings should be avoided, however. In reality, most people simply do not have large enough disposable incomes to make big one-off investments. As George Strang, head of research at Countrywide, the independent financial advisers' network, points out: "Savings plans do give a certain amount of discipline. A pounds 50 monthly direct debit is painless, and after a period of time you can accumulate a reasonable sum of money."
But next time your financial adviser explains that regular saving takes all the doubt out of investing, remember that life isn't necessarily that simple.
q David Prosser works for 'Investors Chronicle'.Reuse content