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The main goal of all investment strategies is simple – maximize returns yet minimize risk. However, when creating your investment portfolio there are several things you need to consider such as calculating the precise amount of funds available for investing, figuring out your personal risk tolerance and how you should approach buying and selling assets. Another key decision is selecting whether you should invest a lump sum of money all at one go or drip-feed your cash into the market.
One of the most popular ways to avoid market timing issues and reduce some of the risks involved is to invest regularly in what is known as drip-feeding. It’s a simple yet effective solution to making your money work for you. Here, we explain the ins and outs of this investment strategy and why it might be the ideal option for you.
Also known as “pound” / ”euro” – cost averaging, drip-feeding is when funds or capital is placed in the market in small amounts and over a longer period of time as opposed to injecting a large lump sum at the start and holding it for a number of years. In other words, it is a continual process of investing capital into a specific goal. By regularly pooling in smaller sums, investing becomes more manageable, enabling you to build your portfolio for the long-term, while serving as a source of income and profit along the way.
This investing low-cost strategy is particularly appealing to those who can only afford to make small monthly investments but who, nonetheless, would like to pave the way towards financial freedom, while the strategy can also help foster good investing habits.
In addition, a drip-feed approach can help fund a startup if, for instance, a private equity investor contributes through this strategy. The startup will acquire funds as the need arises giving it the necessary boost to maintain and expand its operations, while the investor will be sheltered from some risk if the startup fails.
One of the greatest advantages of drip-feeding is that by investing small and regular amounts of money, you can reduce any risks that arise from swings in the stock market, while it can help smoothen out the highs and lows of investing. This is mainly due to the fact that by spreading out risk, you are essentially buying fewer shares when prices are high and more when prices are low, enabling later investments to cover for any dips in the market. At the same time, reaping long-term profits following a smooth and upwards trajectory may be the better option as opposed to an uneven course of profit and loss, while you could end up better off than if you had invested all your money at one go.
There’s also the common misconception that in order to kick-start your investment you need to have a big lump sum of money, however, that is not always the case. Some investments allow you to start small and so a drip-feeding approach could offer greater affordability. What’s more, establishing your drip-feeding investment is easy to do since you can simply set up a monthly direct debit of the amount you wish to invest.
Here is a very basic example of how drip-feeding might benefit you. If €100 buys you 20 units of a fund at €5 each in the first month and a month later the fund price has fallen to €4, this will allow your next €100 investment to buy 25 units of the fund, providing you with 45 units of the fund in total. On the other hand, if you were to invest the entire €200 in the first month, you would have earned just 40 units of the fund.
And as mentioned earlier on, drip-feeding your investments can help you mitigate any risks. So if for instance, you had €1000 but you chose to invest this amount in four separate €250 investments and the first one falls in value, your other investments could cover the dip.
Here is one more example that illustrates the power of compound interest.If you invest € 10,000 at an annual interest rate of 10%, compounded monthly, the value of the investment after 20 years would be € 73,280.74.
Drip-feeding investing may offer a layer of protection from risk but this also means that your returns are likely to be lower than say a well-placed lump sum. In addition, it may be difficult to decide how much to invest every month when considering that the longer your money sits in an account, the more inflation will eat up into your purchasing power leaving you with a smaller net worth.
Ultimately, whether you opt to lump sum or drip-feed your funds will largely depend on your goals and whether you are looking for quick returns and a short turnaround or you are happy to wait for the windfall and perhaps make most of the money you would have originally invested. Investing all your money at one go may ensure that it goes to asset classes that have proven to outperform others, while you may also be able to receive dividends from companies whose shares you own. In addition, a large fund may open up a wider variety of investments, particularly those that require a higher minimum investment amount.
Yet, if the risk factors of your investment are unclear or you simply cannot afford the volatility that comes with lump sum investing, a drip-feeding strategy is the better choice. It also means that you can pick up some investment bargains particularly if you are looking to buy low and sell high. Naturally, buying stocks when the market is plummeting might not seem a wise thing to do but should the markets fall, you would have lost far less.
When it comes to investing, basic rules like buying low and selling high, not putting all your eggs in one basket or resisting from taking on more risk than you can afford are common. All financial investments carry an element of risk and there is no single solution that is right for every investor. Whether you choose to drip-feed or not, it all boils down to the time frames set, the amount of risk you are willing to take and what income you need.
Remember that if you are not confident to take investing into your own hands, seek professional help. Armed with the necessary knowledge and expertise, CC’s financial advisors can review your situation and help you make the most of this approach. Have a look at CC’s full range of investments.
The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly, any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views, or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views, or opinions appearing on this website.
Calamatta Cuschieri Investment Services Ltd is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act.
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