Forget ‘drip feeding’, the best time to invest is as soon as you possibly can
Trying to time the market can be costly – it’s best to get your money working, writes Charlotte Gifford
Investors often agonise over which stocks and funds should make up the bulk of their portfolio. But comparatively little thought is given to the timing of their investment.
This is despite the fact that investors could be £1,500 richer in one year depending on when they enter the market, according to research.
Here, Telegraph Money definitively answers the age-old investing question: when is the best time to invest for the highest returns?
The perils of timing the market
“Timing the market” is when investors try to predict market movements to make a profit. But research has consistently shown that this strategy does not pay off – as even small errors can cost investors dearly.
Since 2000, the S&P 500 has risen 245pc. However, if an investor had missed the top 10 days in the market, their returns would have plummeted to just 59pc, according to analysis by investment manager MGIM.
Gabby Byron, of MGIM, says: “Investors will often find themselves selling prematurely, missing out on significant market rallies.”
Panic selling is similarly risky, because investors who sell during a downturn can end up missing out on substantial gains when the market eventually recovers.
“In 2020, one of the best days occurred immediately after one of the worst, emphasising the importance of resilience and patience in navigating market turbulence,” says Byron. “Enduring market noise and volatility is often the price to pay for long-term returns.”
Lump-sum versus regular investing
Some investors will find themselves in the position of having a large sum of money to invest. The question for these investors is: should they invest the money all at once, or drip-feed it into the market – also known as poundcost averaging?
Of the latter method, James Norton, of asset manager Vanguard, says: “What often tempts investors to use this approach is that pound-cost averaging could provide some protection against the market dropping sharply shortly after the money is invested. No one wants to accidentally buy at the top of the market.
“So, instead of the entire investment suffering this loss, only the smaller invested portion does. In theory, the remainder is then invested at lower prices. In this way, if the market was falling, pound-cost averaging would work well.”
However, most of the time, poundcost averaging will lead to lower returns. Vanguard found that, after one year, a $100,000 (£79,011) investment in a 60/40 portfolio would be worth $109,360 (£86,398) using the lump-sum approach, compared with $107,453 (£84,900) using cost averaging – a difference of almost £1,500. A 60/40 portfolio is divided 60pc in equities and 40pc in fixed income.
This is because investors drip-feeding money into the market are often buying when prices are increasing, as markets tend to go up more often than they go down, Norton said.
The benefits of investing early
While pound-cost averaging may not be the best option if you have a lump sum to invest, it’s still a good idea to make monthly payments into your investment account, if you can afford to. This ensures that you are regularly squirrelling away money for the future.
Guy James, 26, from the South West, started investing for the first time three years ago. “I invested £100 to start with, and quickly set up a direct debit,” he said. “I don’t have the time to pay attention to it so I just invest £25 a month into trackers and recommended funds.”
Initially he invested in shares, but since then he has invested in S&P 500 and FTSE 100 tracker funds, along with some funds he has spotted on recommended lists, including Baillie Gifford Managed.
According to stockbroker Hargreaves Lansdown, most of its investors choose to invest in March, closely followed by April – around the tax year end. Investing at the start of the calendar year allows people to use up their remaining annual Isa allowance before they lose it, but it can be better to put money away as soon as a new tax year begins, as early-bird investors enjoy more time in the market.
For example, someone who had invested £3,000 in a global equity fund on the first day of each tax year between 1999 and 2023 would now have a pot worth £200,373, according to calculations by AJ Bell. However, if they had invested the same amount on the last day of each tax year their pot would be worth £191,102 – nearly £10,000 less.
Emma Wall, of Hargreaves Lansdown, said: “There are two good times to invest in the stock market: as soon as your circumstances allow, and then again, on a regular basis.
“Among our clients, the beginning of the year tends to be the busiest. The ‘January Jump’ sees investors turn over a new leaf at the start of the year and open an Isa to make the most of their money. We also see a rush of last-minute Isa investments as people take advantage of their annual allowance before they lose it, which is one reason why March was the third-busiest month for Isas, and April the second.
“These investors know that the earlier they invest during the tax year, the longer they can benefit from tax-efficient growth on their investments.”*
Gabby Brown
‘Enduring market noise and volatility is often the price to pay for longterm returns’