Drip-feeding your investments can help you smooth out peaks and troughs, and it can mean less dramatic falls. When it comes to investing, many people get put off by the assumption you can only do so with a large lump sum. But this is not the case. Not only is it possible to invest with smaller amounts, but it can also be beneficial to do so.
At the same time, dipping a toe into the market with smaller amounts can alleviate some of the fears you might have about investing, helping to ease your concerns about losses.
What does drip-feeding involve?
Rather than investing, say, £10,000 from the word go, you can opt to slowly add money to the market each month, potentially starting from as little as just £10 or £20. Equally, if you are looking to boost existing investments, you can apply the same principles. In this scenario, drip-feeding means you slowly add money to your portfolio, rather than putting in a big amount all at once. So, what are the potential benefits?
You don’t need a big sum to get started
One of the big upsides of drip-feeding investments is not being required to have a lump sum to hand. This can be an especially big help if you are investing for the first time or feeling uncomfortable about committing too much at one time.
Alleviate fear about investing
A survey by Lloyds Bank revealed that half of UK adults – rising to 58% of women – are intimidated by investing. As drip-feeding allows you to invest with a smaller sum, this can feel a lot less daunting than parting with thousands of pounds all in one go. The whole process can feel simpler and more affordable.
Remove the temptation to time the market
Regular saving can help remove the emotion from investing. It can help you avoid fixating on market noise or short-term volatility – and may mean you are less set on trying to time the market. After all, while every investor dreams of buying when shares are at a low and selling at a high, it can be a fool’s game – even at the best of times.
Just missing out on a handful of good days can have a devastating impact on your total returns. Drip-feeding does away with all this, as you no longer have to worry about investing at the ‘wrong’ time.
Smooth out market returns
Tuck away a lump sum and you run the risk the market might fall shortly after you invest, immediately eroding some of your capital. Save regularly and you are only exposing yourself to the market in relatively small chunks – thereby taking advantage of what is known as ‘pound cost averaging’.
This refers to the way that drip-feeding money into investments on a regular basis allows you to buy assets at different prices rather than at one value. Buying more units of investments when prices are low allows you to boost your long-term returns while riding out the short term dips.
Help you get into a saving habit
Another benefit of the little-and-often approach is the fact you will kick-start a healthy savings habit – and one you are likely to keep – even during difficult times. This approach encourages savers to stick to a regular investment pattern that helps their money work harder on a consistent basis.
Equally, by saving small amounts monthly or quarterly, your money can – thanks to the power of compounding – grow substantially over time. Compounding is where you earn returns on your returns, essentially turbocharging them. So, the longer you invest, the more you can potentially benefit.
Seek advice
While regular investing can have its benefits, this doesn’t mean you can ignore investment risk. It’s still crucial to weigh up which choices are right for you. If you want more help and guidance working out which investments suit your risk profile, your goals, and your circumstances, it may be worth seeking advice from the professionals. We’ve got ten questions you should a financial adviser to get you started.
