Many people assume that to become a wealthy investor you need a large pot of money to begin with. Yet almost anyone has the potential to build a sizeable sum over time by investing small amounts regularly. The important thing is getting started, and the earlier you do the more time your chosen investments have to grow – and time can be an exceptionally powerful ally.
Time on your side
Take two investors, both investing for retirement in 40 years’ time. One starts investing £100 per month right away, the other does nothing for 20 years, but then invests £300 per month. The investments chosen both grow by 5% per year after charges. At retirement, the first investor will have spent £48,000 on their monthly contributions and the second investor £72,000. Yet despite having spent much less, the first investor’s retirement pot would be worth £148,252 compared to the second investor’s £121,741.
Even if you don’t have a multi-decade time horizon it’s still possible to build up a significant sum by saving regularly. In addition, regular savings are flexible, so you can stop and start them as you wish or change the amount. You can also change where you invest to suit your views and the level of risk you want to take.
By investing a given amount in a fund regularly you end up buying at different prices. Dips in the market, particularly in the early years, could even work to your advantage.
For example, if you invest £100 every month into a unit trust fund, the cost of the units for each purchase will depend on how the assets in the fund have performed. For example, if in month one the units cost 50p each you would get 200 units for £100 invested. If in the second month they are 54p each you would get 185 units for the same amount of money, but if they dip to 40p you would get 250 units.
By investing monthly in chunks, rather than a larger lump sum in one go, an investor ends up buying more shares or units when prices become cheaper and fewer when they become more expensive. This can be a great way to invest because if you keep buying the market falls you could, over time, turn volatility to your advantage. This effect is known as ‘pound cost averaging’, and over longer periods it can help smooth out the highs and lows of the market; though there are still risks and with all investments, you could get back less than you put in.
Another important aspect of committing to regular savings is that it takes away the decision making about when to invest. It removes concerns about timing the market, whether it’s expensive or about to fall, and enforces a healthy discipline of investing at all times – good and bad. If the market falls, you can ignore it in the knowledge you have committed to investing for a long period and your chosen investment has become cheaper to accumulate.
Redwood Financial is one of the souths leading Savings, Investments, Pensions, Wills, Trusts & Estate Planning providers and we are dedicated to helping families to grow, protect and enjoy their wealth. With our unrivalled knowledge of Investments and financial wealth planning, we can advise on any situation. Join us at one of our Free Public Information Seminars on Wills, Trusts & Estate Planning: Book online Book Me A Place!, Call us on 01489 877 547 or Email firstname.lastname@example.org to book a FREE Initial Meeting with us to review your financial planning needs.
Source of blog article charles-stanley.co.uk