How to benefit from investment market fluctuations

Timing investment transactions, especially where large single premiums are involved, becomes particularly crucial at times like these, according to Standard Life.

When markets are volatile, to get the best possible deal - invest on a day when markets are low - you either have to be very lucky or very knowledgeable. And even if you are knowledgeable you can get it wrong sometimes.

An alternative option is to gradually phase investments, lessening the risk that people choose the wrong date to invest (the day when the market is very high). This happens as a matter of course when people have a regular savings contract. But for people who invest large single premiums, the risk is much higher that someone can invest at the top of the market.

The ability to spread the risk and buy some units when investments are low is known as pound cost averaging. This can take the worry out of investment decision-making. If the market falls, the client benefits by getting more units when the price is low. And it makes timing less critical as the investment is not as sensitive to market risk. By spreading the investment the price paid for investments is averaged out and the possibility of investing everything at the top of the market is avoided.

The following examples are based on FT Share Indicies rather than a specific investment fund. So the value of the investment these clients are making varies exactly in line with the indicies.

Case study one. The benefits of pound cost averaging over a longer period of time

Jim invested £48,000 in the FT All Share index on 31 December 1999. At 31 December 2007 this is worth £48,660.

Derek invested £1,000 in the FT All Share index each month from 31 December 1999 to 31 December 2003. In total Derek invested £48,000 and at 31 December 2007 this is worth £65,620.

7 years later, the value of Jim's investment is approximately the same as his initial investment. Derek's investment has risen by £17,620 or, in other words, a 37% increase in the original investment. Derek has achieved this by simply drip feeding the investment rather than taking the risk of investing all on one date.

Case study two. The benefits of pound cost averaging over a shorter period of time

Alison invested £10,000 in the FTSE100 Share index on 1 January 2008. At close on 11 April 2008 this is worth £9,102.35.

Helen invested £2,500 in the FTSE100 Share index on the first working day of January, February, March and April 2008 inclusive. In total Helen also invested £10,000. At close on 11 April, Helen's investment is worth £9,871.82.

On 11 April, Helen's investment is worth £769.47 more than Alison's, simply by spreading the investment over 4 months rather than investing it all on 1 January.

Andrew Tully, Senior Pensions Policy Manager at Standard Life said: "Investing at the top of the market can have a significant impact on the amount people receive at the end of the day. It is possible to be right about the future direction of a share price or market, but lose money because the timing of the transaction was off. Pound cost averaging gives the potential to achieve sustained growth over time, regardless of short-term fluctuations. It can allow people to concentrate more on where to invest their money rather than wasting effort on trying to find the exact best time to invest. While markets continue to be very volatile it is worth considering the benefits of a simple, hassle-free way of spreading a client's risk by drip feeding their investments."

Standard Life are helping advisers and clients by offering the ability to gradually drip feed a SIPP single contribution into the investment market. The single payment is paid in the same way as any other, with no additional work for the adviser. But if the client and adviser wish, some, or all, of the money can initially be held in the SIPP bank account and gradually drip fed into their chosen investments over a pre-agreed period of time - 3, 6, 9 or 12 months.