Thursday, June 26, 2008

Invest Monthly or Once-Off?

The question is often raised as to whether it is better to invest a regular monthly payment over a period of time or just invest a once-off payment at outset (assuming you can afford it).

To the best of my knowledge, there is no clear answer to this. It is impossible to predict how markets will pan out in the future. The only information on which we can base our analysis is on what has gone before. This, however, is not something that sound financial planning is based on.

The following examples may give you food for thought.

Example 1.

€50 per month (level contribution) for 10 years
€6,000 Lump Sum invested for 10 years

Surrender Value of monthly plan on the 31/10/2007 is €8,862.11
Surrender Value of lump sum on 31/10/2007 is €12,618.25

(Both invested in the same unit linked fund and started on the 01/11/1997. The only charge is a 1% Annual Management Charge.)

Example 2

€100 per month (level contribution) for 5 years
€6,000 Lump Sum invested for 5 years

Surrender Value of monthly plan on 31/03/2007 is €9,130.94
Surrender Value of lump sum on 31/03/2007 is €9,025.56

(Both invested in the same unit linked fund and started on 01/04/2002. The only charge is a 1% Annual Management Charge.)

Please bear in mind that the results illustrated above are specific to the criteria noted and the time frames involved. I specifically requested the examples from the Life Office that would show where one method of payment out-performed the other so that I could highlight the quandry.

Perhaps the answer lies in a combination of regular and sporadic once-off contributions?


Sandy said...

Hi Gerard,

The comparison should have included the investment return on the 6000 fund which you were drawing on for the 50/100 euro monthly investment.

Also to invest in one lump sum is more dependent upon picking the right time to invest which is impossible to know.On the other hand by small monthly investments you will spread the investment over a long time and therefore invest in both good and bad times(get more units for your money in bad times) but on average since funds go up in the long run you should do ok.

I invested 100 pounds a month with Irish Life starting in 1990 and rising to 180 euro a month at present.It is currently worth 38600.There was high sales commission in the first year which pulled it down.You will not make a lot of money on these products but will beat deposit rates if you leave it invested long enough.

I invested in shares directly but never made real money over the years.If you are a small investor in the stock exchange more often then not you will be a lamb to the slaughter.

I also tried the property route and that was better but property is hard work, responsibility and can be troublesome.

There is no easy way.

The only people who always make money are the fund managers.



Gerard said...

Hi Sandy,

You are right. There is no easy way. The best that we can do is research the product and its charges, so that there is no unnecessary drag on the returns that might be available to us.

It is also important to carefully select the funds at outset, that are representative to our risk profiles, and stick with them.

Far too many people start chopping and changing funds, and invariably miss out on any increases when they happen. This mainly happens when funds start decreasing for a prolonged period of time as panic sets in.

But I don't need to tell you that, as you seem to have it sussed.