Which is better – a lump sum or regular saving investment?

Lump sum investing can return considerably more than regular saving investing over the long term.

However, the advantage of lump sum investing just before a market rout is more muted.

A regular saving plan comes with less dramatic falls in value along the way. ISA investors are by nature regular, and the long run difference between monthly ISA saving and annual ISA saving is relatively small.

Laith Khalaf, head of investment analysis at AJ Bell, comments: “The power of compound market returns is a humbling force, which tends to favour lump sum investing over monthly savings, simply because more of your money is in the market for longer. But when it comes to the losses you sustain in market downdrafts, it’s the regular savings plan which wins the day, because less of your capital is exposed, and your monthly contributions continue to buy shares at cheaper prices.

“As we approach the end of the tax year, many investors will be stuffing lump sums into their ISAs to beat the call for last orders on 5 April, but there are compelling reasons why they might set up a monthly ISA investment plan at the same time.”

Lump sum vs regular savings

“Returns over the last twenty years suggest that you should get your money into the market sooner rather than later. A £20,000 lump sum invested in the typical global equity fund 20 years ago would now be worth £118,570. A comparable regular investment plan of the same amount in total, or £83.33 a month, would now be worth £51,360, less than half the value, despite the same outlay in cash terms. However, these figures do come with large caveats attached.

“If you have £20,000 to invest as a lump sum, but decide instead to drip feed it monthly into the market, then you can expect to get interest on it while you wait. This could boost returns significantly over long periods of time. Assuming a 4% interest rate on standing cash, £20,000 invested in a global equity fund in monthly chunks of £83.33 over the last 20 years would now be worth £70,295. However, that still falls far short of what a lump sum investment would provide, again as a result of the higher compound returns provided by the market.”