Many wise people have talked about this. Ive read articles, talked to people I respect, and listened to some great debates and opinions on the theories of whether you should ‘dollar cost average’ your money, or just invest in lump sums.
For those of you who don’t know what ‘dollar cost averaging’ is…. It’s basically spreading out your savings.
Let’s say you have $100, or in my case £100, rather than chucking it all into your investment plan of choice you decide to put in, say, $10 a month for the next 10 months.
So why do this?
Now I’m sure some smarty pants mathematical genius, which I am not, has a formula for this being the best way to infest, but here’s my reason.
It takes the thought out of investing.
And taking the thought out of most things simplifies it.
And simplifying anything makes it easier to do.
Now you might not get the sudden sense of achievement from making a wonderfully insightful (lets admit it – probably flukey) investment at the perfect time. “Oh how clever I am. Just look I bought lots of shares in this company just before they doubled”.
But also, you won’t get the gut-wrenching feeling when you lay out your hard earned cash on an investment that goes bust almost immediately, or the market crashes, or some other catastrophe occurs.
So I like to decide roughly what I can afford each month, round it down a little to give me some breathing room, and set up a monthly payment into each of my savings pots.
That’s X amount into the ISA. Y amount into my SIPP. Z amount as my mortgage overpayment.
Set it and leave it. Never think about it again. Because you’ll get a warm fuzzy feeling knowing that every single month you’re making things better, saving diligently, improving your future, and you don’t even have to think about it!
Now I admit the whilst I do this, I’m in a commission based job so sometimes I end up with a little more cash in the bank. This is money that’s not allocated to my XYZ pots. Its just sat there. Taunting me.
First world problems!
I can’t set up a regular savings payment for this. Its not guaranteed, and the extra could be tiny or huge (i wish). So now I have to decide what to do with it. God I wish I could set up an automated way of getting rid of the cash, but I find myself thinking…
“hmm..the stock market seems a bit high at the moment. Maybe i’ll wait a month or so and see what happens?”
“But which is best. Invest or pay more off the mortgage?”
This is exactly why the automated payments are best!!!! I’ve already made these decisions and need to get a grip!
So this is where you have to just suck it up and go the lump sum route. Stick to the formula. Make it easy on yourself.
You have three places you save regularly? Divide the extra into three! Get rid of it asap, and make the money work for you! I can’t see what’s going to happen. I’m not a financial genius. Throw the money into those pots and let the maths do the heavy lifting!
Don’t try to time the market. Stick to your plan. And if you keep the money in the wrong place it will undoubtedly be wasted.
Ps. If you want good info these guys know what they’re talking about.