Lump sum investing or drip feed?

There are plenty of different choices when you invest. Shares or bonds, income or growth … and drip feed or lump sum investing. The latter can cause some debate and, while both approaches have their merits, we think it may be best to get your money into the market, in one go.

Different strokes

We’re asked about different ways to invest all the time, but one recent question got us thinking: is it better to invest all your money into the market, in one go with lump sum investing, or drip feed it, little by little?

It’s not quite as simple as your personality type – where some people can dive into the water easily while others must dip their toe first.

Investing’s too important for that. So here are the pros and cons of what we call the lump sum versus drip feeding approach.

Testing the waters

Drip feeding can help a cautious investor make the most of lower share prices. It’s also called ‘pound-cost averaging’ and it works as follows – which is something we borrowed from the investment giant Fidelity’s website:

Here, you invest £5,000, buying 253.4 shares for an average price of £19.73.

This can help people in volatile markets, when prices rise and fall rapidly. Such movements can evoke fear. We daresay we’ve all made investments over the years that have swiftly fallen in value – it can be dispiriting.

Drip feeding can minimise losses, take advantage of those lower share prices and take some of the emotion out of investing.

Get in

The counterpoint is lump sum investing.

This is where we declare our hand, because we happen to think it’s usually the most appropriate approach. But we’ll explain what it is before making our case.

You invest a lump sum if you think that, despite the daily rise and fall, the market will grind upwards over the long run.

Another investment giant, Vanguard, published research showing the lump sum usually beats the drip feed. They measured both approaches for each year between 1976 and 2022 (a period with plenty of market ups and downs) and found the lump sum won between 61.6% and 73.7% of the time.

This is all because you’re investing more money, earlier.

Going back to that grid from Fidelity, above, we’d rather get £5,000 in the market from day one. Buying at £20 and getting to £21 just four months later (in this simple, hypothetical example) gives a 5% return … and this is what we’re interested in over the long term.

Compounding

The earlier you get your money into the market, the earlier it can work for you through compounding.

You probably know all about compounding. It’s the near magic that makes the most of those upwards market movements.

Let’s assume I invest my £5,000 in one go. And my return is a steady 5% a year, compounded annually. Speaking hypothetically, in the first year I may get up to £5,250, in the second £5,512.50 and by the fifth it’s £6,381.41. That’s an overall rate of return of nearly 28%. In just ten years, I could make it to £8,144.47 – a nearly 63% return. And, in 14 years I may have doubled my money.

Of course, this is another simplified, hypothetical example. Real investments fluctuate and no return is guaranteed.

And at First Wealth we deal with much larger sums of money – in significantly more complex scenarios.

Often, this complexity naturally leans into lump sum investment. Received your bonus? An inheritance? A windfall? Why wouldn’t you invest it and let that compounding work away while you worry about other things?

The alternative is often cash. The rates on cash accounts are at a high, but they are unlikely to stay there. And, as research from yet another giant of the investing scene, Schroders, shows, shares are a far better bet than cash when you want to keep ahead of inflation – especially over longer time periods.

We declared our hand early, and this is why. A lump sum will give you that precious, additional time in the market. If you’re cautious by nature there are plenty of lower risk options with the lump sum.

If you’d like to discuss your investment goals, please get in touch on hello@firstwealth.co.uk or call 020 7467 2700.

[1] https://www.fidelity.com/learning-center/trading-investing/dollar-cost-averaging#:~:text=Dollar%2Dcost%20averaging%20is%20a,a%20particular%20investment%20is%20going.

[2] https://www.vanguard.co.uk/professional/vanguard-365/financial-planning/financial-well-being/cost-averaging

[3] https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php#google_vignette

[4] https://www.schroders.com/en-gb/uk/intermediary/insights/with-cash-earning-5-why-risk-money-on-the-stock-market-/

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.