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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.