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Slow & Steady Wins the Day
09/15/2008 12:00 am EST
Chris Gilchrist, editorial director of EveryInvestor, says patient investing beats market timing.
With the UK stock market in panic mode, it's the ideal time to start a regular savings plan, accumulating lots of investments at low, low prices.
It’s simple, really. If you invest a fixed sum of money every month, it buys you more investments when prices are low than when prices are high.
For example, investing £100 per month in a UK Index Tracker fund, beginning in July 2000, would have turned the £9,600 you contributed into £12,000, or a 5.5% annualized return—even though the index is down 14% since then. Calculating the level of the index every month from July 2000 and averaging those figures, gives you the average level of the index at which you bought.
But in fact, your average purchase cost was lower, because your fixed £100 per month contribution bought more units at lower than at higher prices. Over the years, this “cost averaging” effect provides a virtually guaranteed way of making money.
If, however, you had contributed £100 per month to Fidelity Special Situations (http://www.fidelity.ca/fidelity/cda/live/0,,6683,00.html?strmid=54), one of the top-performing funds, the cash-in value of your plan would be £14,000, an annual return of 9.2%.
For regular savers, the volatility of the stock market is the source of profit—provided you have a ten-year time scale in mind and pick sensible investments. As the professionals would put it, regular savings tilts the risk-reward ratio heavily in your favor: less risk, more reward.
The question is: which fund or funds? If you want to buy and forget, choose an index tracker fund. But if you want the chance to get higher returns and are prepared to regularly review your fund selections, use a self-selected ISA (Individual Savings Account) with a fund supermarket and spread your contributions across several funds.
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