Regular investing versus lump sum investments

Whilst the FTSE All Share posted one of its best monthly returns in the last twenty five years in April, it's nevertheless been a torrid year for investors.

However, those who drip fed their money into the stock market on a monthly basis fared considerably better than lump sum investors, reducing their risk profile by a significant margin, according to data from the Association of Investment Companies (AIC). But as markets have rallied recently, is the tide about to turn for lump sum investors?

AIC research shows that a £50 per month regular investment in the average investment company over the year to 30 April 2009 is down 7% to £558. This compares to a 30% loss, a decrease to £419, for those who invested the same amount (£600) as a lump sum over the last year. Similarly over the last three years of volatile markets regular investments have outperformed lump sum investments but it has been a tough time for investors. A regular monthly investment of £50 in the average investment company over the last three years (£1,800) to 30 April 2009 is down 22% to £1,410. Whereas the equivalent lump sum over the last three years is down 27% to £1,314.

However, during the month of April 2009, the investment company sector has performed well as markets have improved, up 13.4% compared to a 9.9% increase in the FTSE All Share (source: Wins). If markets are able to sustain their upwards movement, historical data from the AIC suggests that lump sum investors have outperformed regular investors over longer time frames.

Lump sums outperform over longer-term

Over the long-term markets have generally risen, and over the last five years, a lump sum investment of £3,000 in the average investment company has increased to £3,786, up 26% whilst the same amount drip fed into the market on a monthly basis (a £50 per month investment) has actually made a loss of 10% to £2,705. Whilst over the last five years markets have seen some gains, the last year or so has seen dramatic falls.

The AIC data suggests that the longer the time frame, the more lump sum investments tend to outperform regular investments. Indeed over the last ten years, a £6,000 lump sum investment in the average investment company to 30 April 2009 is up 44% to £8,638 whereas the same amount invested on a monthly basis has grown 15% to £6,921. Over twenty years, a £50 regular investment (£12,000) has increased 86% to £22,313 whereas the equivalent lump sum investment has increased dramatically 301% to £48,120.

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: "The recent upturn in markets may well be tempting investors back to investment. Our research illustrates that over the longer term lump sum investments have outperformed regular investments as markets have generally risen over a long time-frame. If the market bottom has now been reached this could be the moment when lump sum investments begin to outperform regular investments.

"However, it's worth remembering that in the recent choppy market conditions, regular saving has outperformed lump sum investments. In this context, investors looking to re-enter the stock market may be prepared to give up some of the potential long-term outperformance of lump sum investing and gain a lower risk profile by drip feeding their investment. Regular saving can help smooth out some of those stomach churning highs and lows in the price of shares which means that investors buy fewer shares when prices are high and more when prices are low, removing some of the risk of market timing. You can invest in investment companies from around £50 per month or from £250 lump sum."