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.
Drip-feeding your investments can help you smooth out peaks and troughs, and it can mean less dramatic falls. 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. Here we take a closer look.
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.
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 a big help if you are investing for the first time.
Alleviate fear about investing
Recent findings from Lloyds Bank revealed half of Brits – rising to 58% of women – are intimidated by investing. Jo Harris from Lloyds Bank, said: “We know there’s an appetite among Brits to make their money work harder, but investing remains a confusing and intimidating topic for millions.”
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. 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.’
Jason Hollands, managing director of Bestinvest, said: “With this strategy, rather than buying a lump sum at a single price point – such as during a supposed dip – investors can buy smaller amounts at regular intervals, no matter what the price is at the time. This cushions the effects of volatility in both the short and medium term.”
Help you get into a saving habit
Another benefit of the ‘small and often’ approach is the fact you will kick-start a healthy savings habit – and one you are likely to keep to – even during difficult times. Mr Hollands added: “This approach encourages savers to stick to a regular investment pattern than 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.
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.
Head here to read more about finding a financial adviser. If this feels beyond your means, a financial coach could be a lower-cost alternative, helping you decide the best way to reach your big savings and investment goals – without the big price tag.
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