In order to make money as an investor, you have to think long-term. Investing for just a couple of years and then withdrawing funds won’t make you that nest-egg you’re dreaming of for the future. As a rule of thumb, the longer you invest your money for, the greater the return you should receive. Many investors invest lump sums that stay invested for a minimum of five years. If however you don’t have a lump sum to invest, making regular small investments can be a lucrative way to make money. This is done through what is known as ‘pound cost averaging’, which we’ll explain a little later in this article. As with any form of investment, always keep in mind that values of stocks, funds and shares can always go down as well as up, and will be affected by economic and political world events.
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The good news is that you don’t have to have a large lump sum to start investing. You can invest as little as £25 per month on many investment platforms, and can make as many increases to your monthly contribution as you like. You can even set up an investment to be made every month automatically using such platforms. By regularly investing like this, you have continued access to markets, and don’t have to wait for the prime opportunity to invest a lump sum of money.
Pound cost averaging
Regular investing every month revolves around a method called ‘pound cost averaging’ – a technique that involves the investing of a fixed sum on a frequent basis. For instance, if you invested £100 per month over 10 months, and the share price remained the same, any movement in the price of the shares you have purchased will have less of an effect on your investment’s overall value. That said, if share prices changed, you’d end up buying more shares when prices were lower, and fewer shares when prices were higher. As a result of investing smaller amounts of money, you’ll also receive a smaller amount of income that has been generated from your investments (in comparison to if you invested a large lump sum of thousands of pounds).
Riding out market ups and downs
Financial markets are volatile and can always go up or down depending on global financial and economic circumstances. By regularly investing small amounts of money into markets however, you can ensure that you are investing your money into a range of shares that have varied prices. On average, the price for all of these different shares should be roughly the same, which can help balance out your profits from successful shares with those that are under-performing.
Timing the market
Market timing, which is essentially the practice of trying to secure shares, funds or assets when they are at their cheapest, can be a very tricky process, even for highly skilled investors. Try not to speculate what will happen with assets too much. For instance, some shares may fall in price on one occasion, but that doesn’t necessarily mean that they’ll hit a rock-bottom price. Investing on a frequent basis can give you more investment discipline in the long run, and will help you make more measured and reasonable judgements about market behaviours. If you have a lump sum, you’ll have no choice but to invest the entire lot. By spacing things out, you have more control and will become more organised with your financial portfolio.
Investing large sums of money can be a huge gamble, leaving some investors in a panic over whether they have made the right decision. Also, if share prices fall, investors with large sums of money that are invested into one type of product are more likely to panic and sell out. If you’re inexperienced in investing, dipping your toe in the water and investing little and often is a great solution for those times when the markets may be a little volatile.
Beware of charges
You need to consider charges, especially if you are investing little and often. Make sure that you are not investing into lots of different funds across various markets, as this will cost you a ‘dealing fee’ for every trade. It is possible however to use an investment platform which can help you invest regularly without being charged fees. Some have loyalty schemes if you regularly invest, so the charges you’d originally pay to purchase shares are greatly minimised, or even free. Also make sure that you have enough money in your account to actually make regular investments in the first place. While you can maximise your profits, you don’t want to run out of cash. Only set up a direct debit if you are sure that you can afford to.