Making mountains out of molehills – why investing monthly works
We explain why ‘little and often’ is an effective way to invest.
When we think about investing, we often imagine investing a lump sum. But having a large amount to invest all at once is quite rare. Most of us build up our savings by squirrelling away a little of our pay each month.
And in fact, investing little and often has a number of advantages.
Investing monthly offers an affordable way to build up your investment pot, and it builds good habits too. And best of all, it can help reduce the risk of volatility – sharp moves in the value of your investment.
Here are five reasons we think investing monthly is a good idea.
It reduces risk
You’ll probably have heard the phrase, ‘buy low, sell high’.
But in practice, knowing when to buy and sell investments is incredibly difficult – even for the most experienced investors.
If you invest a smaller amount every month, you’re removing the risk of investing a larger amount at the ‘wrong’ time. Instead you’re averaging out the price you pay and benefiting from a phenomenon known as ‘pound cost averaging’.
This means your investment buys more shares if the price goes down, allowing you to smooth out the returns from investing in the stock market.
Of course, investing monthly doesn’t remove risk entirely though. You’ll still see the value of your investment move up and down day-to-day, and when you come to sell, you could get back less than you invest.
It takes the emotion out of investing
Knowing the perfect time to invest is almost impossible. Often people follow the crowd – they buy when the market rises and sell when it falls. This is a part of human nature, but it usually means lower returns over the long term.
But even if you know that in principle, in practice it’s still hard to avoid making rash decisions when you see the value of your investment falling.
Monthly investing can help stop you reacting to short-term market movements. By sticking to a disciplined investment plan, you’re less likely to make emotionally driven choices that could cost you in the long run.
If you’re investing every month and the stock market does fall, you’ve only invested some of your savings. And, because of pound cost averaging, when the price is lower, you’ll benefit as your monthly payment will buy more shares.
It’s affordable
It’s a common misconception that you need large sums of money to start investing.
You don’t. In fact you can start from as little as £5 a month. Even small amounts can build up over time into a useful sum.
And as with other monthly payments (such as phone or utility bills), you’ll soon get used to the money leaving your bank account or pay packet each month.
It’s habit-forming
Consistency is key to success in many walks of life, and investing is no exception.
By committing to monthly investments, you can kickstart a positive financial habit that can have a lasting impact on your overall financial wellbeing.
It’s also automatic – so when life gets in the way, you don’t forget to invest or put off decisions for another time. Your money is automatically put to work in the stock market each month, without you having to think about it.
It’s an easy way to harness the power of compounding
Albert Einstein once described compound interest as the eighth wonder of the world.
He was right. Compounding is a powerful force that enables your investments to grow exponentially over time.
By investing monthly and continually adding to your investment, you’re allowing your money to work harder and generate more returns. And as your investment gains accumulate, they also start generating their own returns, leading to a snowball effect.
Get into the investing habit with Buy As You Earn
If investing monthly sounds like it’s up your street, why not take a look at Buy As You Earn, one of our two colleague share plans. It’s available to colleagues in the UK and the Isle of Man.
With BAYE you can buy NatWest shares each month, straight from your pay. You can start from just £5 a month – the maximum is £150.
And because the money is taken from your pre-tax salary, you’ll save income tax and National Insurance each time you invest.