Investing on a regular basis not only suits most people's income streams but it also helps to create discipline. Making a commitment to set aside a small, affordable amount each month is unlikely to affect your lifestyle and will help you build your future financial security.
While this approach suits the regular income of an employed person, it can be more challenging if you are self-employed and you're paid on a more variable basis.
Although your cash flow may mean you need to commit to a regular contribution every six months or annually rather than monthly, by adopting the same strategy used to save up for a tax bill and setting aside a percentage of income when you receive it, you can still take advantage of the benefits of a regular approach to investing.
Benefits of 'pound-cost averaging'
One of the key benefits of investing regularly is that it unlocks the power of pound-cost averaging. By investing each month you benefit from times when the markets are falling and you're able to buy more units in a fund or shares in a listed company.
As an example, say you invest £200 each month into a unit trust. In January the price is £10 so you buy 20 units. The following two months the price has fallen to £9 so you are able to 22 units in February and March. By April the price has rallied and is up to £11 so you buy 18 units.
This means you've bought 82 units with your £800 investment, which at £11 each, means your total investment is now worth £902. Conversely, if you'd invested the full £800 back in January as a lump sum, you would have bought 80 units, which would now be worth £880 - £22 less than if it had been drip fed into the unit trust.
This approach doesn't always work in your favour though. If the market climbs steadily then your regular investment will buy fewer and fewer units each month, leaving you at a disadvantage to the person who got in with a lump sum when prices were low.
However, as it's notoriously difficult to time the market, at least, by investing regularly, this decision is taken out of your hands.
Regular investment options
While it's possible to invest regularly into any investment, it's more suited to some than others. Pension providers, investment fund groups and many of the investment trust companies have regular savings schemes allowing you to set up a monthly direct debit and forget about it.
You could also consider regularly investing in shares. Although a dealing charge of £10 or so can represent a high up-front charge on a small investment, several of the online dealing services including Halifax Share Dealing, Interactive Investor and NatWest Stockbrokers offer a more cost-effective way to buy shares on a regular basis.
For example, Interactive Investor's Portfolio Builder allows you to buy UK shares for just £1.50 a pop. If you only want to invest £50 into one company's shares each month this works out at a charge of just 3%, compared to a charge equivalent to 20% if a standard £10 dealing charge was in place.
Access will also influence your decision over which investment product to select. With any investment, particularly those directed primarily into equities, you need to be able to leave your money for at least five years, ideally longer, so it has a chance to ride out stock market bumps. If you need to withdraw it earlier, and the stock market has fallen, you could be out of pocket. But, if you decide to major on your pension, you won't be able to touch the money until you're at least 55 years old.
If you are looking to invest regularly also think about what you invest in. While £200 of shares in one company might seem reasonable as a one-off, make the same investment every month and you'll soon have a high exposure to its fortunes. If it performs badly, your investment will too.
Because of this, diversification, where you hold a broad range of assets, is important. This could mean holding different sized companies, or a variety of sectors or shares in companies from different countries. By having this mix of assets you'll be more protected if one does perform badly.
Given this, it is worth consdidering an investment that provides instant diversification from the off. A multi-asset fund will give you exposure to a broad range of different assets so you're cushioned from any shocks.
Also think tax-efficiency. Pensions offer some of the most generous tax breaks but tie your money up until retirement. Isas are also tax-efficient and you can access the money if necessary so it's worth using up your annual allowance before turning to other types of investment.
Building your regular investment
As your investments grow, the nursery slope approach to asset allocation you took when you started out may no longer be appropriate. Although it's perfectly acceptable to stick with a well-diversified fund, you might want to replicate the diversification by building your own portfolio.
Doing it yourself means you're able to introduce additional diversification by bringing in different fund manager styles and approaches, such as value, growth and income; or emerging markets and small companies in developed markets. You can also shape your portfolio to reflect your interests, perhaps adding in a share in a company you really like or a fund that meets your convictions.
If you do want to diversify in this way, using a fund supermarket or online dealing platform makes it easier and will often be the cheapest option. Additionally, with all your investments in the same place, you'll also benefit from simpler administration.
Review the amount you invest
As well as looking at how you manage your portfolio as it grows, also think about increasing the amount you pay in. This might be done automatically, for instance if you commit a percentage of your monthly salary to your company pension and your salary increases, but there's nothing to stop you applying the same principle to any investments you've set up yourself.
Alternatively, as your expenditure changes, look to earmark any spare cash for your savings and investments. Keeping a slush fund in cash, which is easy to access and unaffected by the ups and downs of the stock market, will ensure you're prepared for any unexpected expenses and you can afford to leave your investments to grow.
We make every effort to ensure our beginner's guides are kept up-to-date. However, in the constantly shifting environment of investment and financial services, occasions may arise where elements of a guide become out-of-date. Please double-check the facts before taking any important financial decisions.