Save your way through the hard times

PLAYING the market these days is like taking a roller-coaster ride. You never know if you are going up or down. When the market fell last year, a lot of people were left screaming. This year, shares have done well so far, and the index of leading shares is once again close to its all-time high of February 1994.

But in the past few weeks, more and more analysts have begun warning that company profits are not growing as strongly as they were last year and are expected to grow more slowly still next year. Reported profits in the first quarter of this year were well up on the equivalent period last year, but below the peaks of the third and fourth quarters.

So is it the wrong to time to buy shares, or indeed investment trusts and unit trusts, which are really nothing more than portfolios of shares managed by professional investment managers?

Investing at the wrong time can cost more than most people are prepared to risk. When markets are racing ahead, as they did in the late 1980s, investors do not need to worry about placing lump sums in personal equity plans or unit trusts. However, when markets are volatile or even falling, there is a strong argument in favour of regular savings.

Private investors are often seduced by the rush of publicity when markets are growing strongly. At the same time, those that keep their money in the building society often feel smug when they see returns falling on stocks and shares, instead of regarding the weak market as a buying opportunity.

Regular savings are particularly suitable for more volatile areas, according to Graham Hooper at Chase de Vere. "I had one client who wanted to invest a lump sum about 18 months ago in one emerging market. I persuaded him to put pounds 100 a month into three different investment trusts, and he has really seen the benefit."

Regular savings rather than lump-sum investments mean investors can benefit from pound cost-averaging, a mathematical quirk that means regular savers get more investment units for their money as markets fall.

For example, if you have a savings plan, initially pounds 100 may buy you 100 units or investment trust shares. If share prices fall, the buying power of each regular contribution will move up accordingly.

If markets fall by say 25 per cent, the pounds 100 a month will buy you 25 per cent more shares or units.

When the markets begin to move upwards again, the units grow in value, giving the regular saver a clear advantage over anybody who invested a lump sum. So regular savings plans come into their own when the going gets tough.

As an example of the importance of timing lump-sum investments, if you placed pounds 6,000 in Fidelity UK Growth PEP when the market was at a high in February last year, you would have lost almost pounds 80 by now. But if you had invested three months later, when the unit price was lower, your investment would currently be worth pounds 6,551.

But it is impossible to know when the low point will be. With regular savings, however, your money would be going into the market 12 times a year - a far safer bet.

For example if you invested pounds 8,500 as a lump sum in the Schroder UK Enterprise fund on 28 February last year, on 31 July this year it would have been worth pounds 8,927. But if your pounds 8,500 had been spread over 17 months, the value would have grown to pounds 9,160.

The problem is that regular savers often cash in when bad times loom, losing out in the process. Anyone who buys units or shares at the top of the market and cashes in when they are close to the bottom must lose. This can work so well that some advisers even recommend that their clients increase contributions when markets are falling.

"Most savings schemes allow you to vary your payments and this can make a lot of sense in bad times. Unfortunately, it is very difficult for people to pull away from the herd," said Roddy Kohn, an independent adviser.

Several schemes have been set up to drip-feed investments into PEPs. Fidelity, Henderson and Murray Johnstone all offer a plan where investors can take advantage of their PEP allowances immediately, but the money is fed into the market gradually.

Remember that pound cost- averaging also works the other way. If you take out a regular savings plan when markets are high, your money will buy fewer units, whose value may then fall. "When markets are racing ahead, you are much better off investing a lump sum," Mr Hooper said.

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
News
people
Voices
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn