When it comes to investment planning, it is important to determine a strategy for how much you want to invest and how often.
Some choose to spread their investment across a period of smaller, regular payments, while others prefer to make a single lump-sum investment at the outset.
Both options have their pros and cons, but if you’re new to investing or feeling particularly cautious due to the current economic climate, a strategy of smaller, regular payments might be a good place to start.
As many seasoned investors will tell you, fluctuations in financial markets are inevitable. Sometimes these are gradual, while others can be sharp and sudden. Navigating these periods of volatility can be intimidating; may deter you from investing at all, or prompt you to cut your losses by selling your holdings for significantly less value.
Making smaller regular investments can be a useful strategy to help prevent this outcome by mitigating the impact of short-term market fluctuations and creating a smoother long-term investment experience.
If you look at any stock market chart, you'll see that prices go up and down all the time. Regular investing helps make decisions easier by averaging out the asset price you pay in the short to medium term, rather than having to worry about trying to perfectly time every trade for maximum return. This in turn will help you navigate the markets over the long-term, with less pressure to make a potentially rash decision.
A regular investment strategy helps lower your investment risk. You may get fewer units when prices are higher, but when those prices drop, your regular fixed amount will buy you more units reaping the rewards when the markets recover. With this disciplined approach, your overall investment performance should be more balanced over time.
You might think you need a huge amount of capital to start investing, but with a regular investment strategy, the barriers to entry can be significantly lower. With a plan starting from as little as €60 per month, you can access a wide selection of mutual investment funds managed by professional fund managers. Mutual funds would have exposure to a number of different holdings hence helping diversify your portfolio rather than being exposed to a single stock.
As with any investment approach, regular investments are not a guaranteed money maker. While averaging out the cost of unit prices can help to minimise fluctuations, it is still feasible that a consistently underperforming fund could fail to deliver a positive return. This is why it is important to carry out regular reviews with your financial advisor, who can help you adjust your approach if necessary.
Also, regular investing might not provide the highest return potential compared to a lump sum investment. If financial markets are showing consistently strong upward trends, a lump-sum investment might offer a greater reward, although naturally the risk of significant loss is also increased.
With the help of a trusted financial advisor, you might want to consider a combined approach to boost your return potential while mitigating some of the associated risk. For example, you could use a regular investment strategy as a baseline to gradually build up your capital, and then make lump sum investments when there is an opportunity to ‘buy low’.
Whatever your preferred approach, it is important to keep a long-term view in mind rather than chasing instant rewards. At HSBC, our dedicated financial advice team is on hand to provide all the assistance you need to meet your goals and work towards a better financial future for you and your family.
This article was written by Konrad Borg Myatt, Head of Wealth Products, Advice and Sales Fulfilment, HSBC Bank Malta p.l.c. It first appeared in the Times of Malta on 19 July 2022.