Lump sum versus regular investing is a familiar dilemma for many ISA investors. This often occurs at the start of the new tax year when new annual ISA and pension tax-free allowances become available.
With this year marking the 25th anniversary since the introduction of ISAs, interactive investor (ii) analysed its data to find out which strategies have served investors best over the period.
According to the investment platform’s analysis, lump sum ISA investing performed “marginally” better.
Take the example of an initial lump sum of £6,000 invested on April 6, 1999, followed by additional investments at the beginning of each subsequent calendar year (e.g., January 1, 2000).
By the end of the 2023/24 tax year, ii said investment would have grown to £608,662. This represents a total return of 306 percent on contributions totalling £150,000.
These calculations assume the portfolio replicated the return of the MSCI World index.
Meanwhile, the regular investing strategy, which split the £6,000 lump sum into 12 monthly contributions of £500 from April 6, 1999, then at the start of each month thereafter, would have grown to £595,592, or 297 percent.
When examining the previous 10 years, the performance gap between the two strategies is more pronounced, but both are still impressive.
Using the same assumptions, a lump sum investment of £6,000 per year would have grown to £122,561, compared to the £114,030 for the regular investing strategy.
This equates to percentage returns of 104 percent and 90 pecent for lump sums and regular investing, respectively.
Myron Jobson, senior personal finance analyst at interactive investor, said: “Our analysis shows that there is little between the performance of both strategies over 25 years of ISA.
“In truth, the “lump sum versus regular investing” debate hinges on market conditions when you invest your money – and nothing short of a functioning crystal ball can say which would perform best over a given timeframe.”
Mr Jobson noted that there are advantages to both approaches. He explained: “Drip-feeding investments monthly helps to smooth out bumps in the market – you’re not putting all your eggs in one basket at a single point in the year when markets may be high or low.
“This is a good strategy for investors nervous about investing at times of heightened market volatility.
“It is also a good way for novice investors to get into the habit of investing, allowing them to squirrel away modest amounts regularly into investments for the potential of inflation-beating returns that trump cash savings over the long term. It’s a ‘from little acorns, mighty oak trees grow’ thing.”
Lump sum investing requires having a large chunk of money to invest in one go.
Mr Jobson said: “The reality is many investors won’t have the means to invest a lump sum all in one go, but those that do could potentially benefit from higher compound returns. The magic of compounding is amplified over longer periods.
“Also, making one transaction a year can potentially avoid transaction fees associated with multiple smaller investments – although regular investing is free with interactive investor.”
The key message from interactive investor’s analysis is “there is no single perfect way to invest every time”.
Mr Jobson added: “The ‘time in the market, not timing the market’ investment maxim really does hold weight. So, whether you are lucky enough to have a lump sum, or drip-feed monthly, investing something is likely to be beneficial to your wealth over the long term.”
