Drip-feeding money into volatile financial markets

  • 2nd April 2020

Drip-feeding (or ‘pound-cost averaging’) as it is otherwise known, provides some protection in periods of weakness once money has been invested.

With an unpredictable global economy due to the Coronavirus pandemic, we have experienced significant falls in markets in recent weeks however, for the long-term investor there is the opportunity to drip-feed money into the market.

What does drip-feeding mean?

Drip-feeding (or ‘pound-cost averaging’) as it is otherwise known, provides some protection in periods of weakness once money has been invested. Investment are made in a series of smaller amounts over a longer period rather than investing in a lump sum. Drip-feeding is an investment strategy used when the risk factors of investing are unclear, such as the current situation with volatile markets and uncertain economic factors.

Pound-cost averaging

Source: Routledge

If investing your entire lump sum in one go keeps you awake at night, then the drip-feed approach could be the price worth paying, especially in times of weak markets. Keeping your investment performance as smooth and steady as possible could be a bonus for your well being as well as your finances.

By making smaller regular payments, the investor smooths out the highs and lows of the market, buying fewer shares when prices are high and more when prices are low. This method therefore can reduce the fear of market timing. As we are all aware, it is time in the market, not timing the market that is the foundation of any investments. Many professors and financial experts suggest that you should only drip-feed the market for a maximum of 12 months.

Your investment strategy has to be closely aligned to your goals and your risk tolerance. An investor with a higher risk tolerance may want to put more into their portfolio over a shorter period. Although this could mean a bigger loss to the portfolio if the market falls, when the market recovers, the gains will be much more significant.

Whether you are considering a lump sum investment or drip-feeding into the market the important thing is to ensure that your investment strategy is aligned to your long-term financial planning goals.

Talk to our Independent Financial Advisers today about your long term financial goals.

Information contained within this article is not a personal recommendation of Forrester Boyd Wealth Management. The wording in this article is not to be construed as an offer or advice. We recommend you seek advice concerning suitability from your investment adviser. Investors should be aware that past performance is not an indication of future performance, the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invested.

Sources:

www.fool.co.uk - www.yourmoney.com - www.wealthify.com - www.ivestopedia.com
LGT vestra – advantages of drip-feeding money into the market, 20.3.2020


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