• Savers who drip-feed regular investments could see their Covid-19 losses mitigated by the cushioning impact of ‘pound-cost averaging’
• During the 2001 Dot Com Crash:
o Someone who invested £12,000 in the FTSE100 on 1st January 2001 would have seen their fund value plummet to £7,599 by 31st December 2001 (a 37% fall)
o If the same person had instead invested £1,000 a month over the same period, their fund would have been worth £9,824 by 31st December 2001 (an 18% fall)
• During the 2008 Great Financial Crash:
o Someone who invested £12,000 in the FTSE100 on 1st January 2008 would have seen their fund value drop to £8,600 by 31st December 2008 (a 28% fall)
o If the same person invested £1,000 a month over the same period, their fund would have been worth £10,033 by 31st December 2008 (a 14% fall)
Tom Selby, senior analyst at AJ Bell, comments:
“During periods of extreme market turmoil, it’s important to remember the cornerstones of sensible long-term investing.
“Attempting to time the market can be a fool’s game at the best of times. During one of the most uncertain periods for economies around the world in living memory, it is nigh-on impossible.
“Luckily there’s a simple strategy you can use that deals with this timing risk while also dampening the impact of significant market shocks.
“Drip-feeding your investments on a regular basis – usually monthly – provides an in-built protection mechanism during periods of volatility. This is because you are only exposing yourself to the market in relatively small chunks and, where there is a fall in the value of assets, you buy more at a lower price.”
How pound-cost averaging fared during 2001 and 2008
“The last two significant downturns – in 2001 and 2008 – demonstrate the impact monthly investing can have in periods of economic strife.
“If you had invested a £12,000 lump sum in the FTSE100 at the beginning of 2001, you’d have lost 37% of your money at the end of the year. However, if instead you had drip-fed £1,000 investments every month, your losses would have been less than half this amount, putting you in a much better position to benefit from the market recovery that followed.
“Similarly, someone who invested £12,000 on 1st January 2008 – at the heart of the Great Financial Crash – would have seen the value of their fund plummet 28% by 31st December that year. If instead they had invested it in £1,000 chunks over the same period, their losses would have been significantly lower at 14%.
“There are behavioural as well as financial benefits to drip-feeding your investments in this way. Most obviously, it allows you to break down your investing into manageable chunks, while also helping you budget around your salary.
“This ‘small and often’ approach means saving is more likely to become a habit you will stick with, even during difficult times.”
Analysis based on FTSE 100 total return. Data sourced from FE.
