Deciding when to invest is one of the most important decisions investors face. One universal rule is not to try to time the market, as choosing the wrong moment can prove costly in the long run.
A £10,000 investment in the FTSE All-Share in 1986 would have grown to £36,752 by the end of 2015 if it was left invested for the entire period.
However, missing the 10 best days of the market in that period cuts that return almost in half, dropping it to £19,888, according to JP Morgan Asset Management.
The conventional way to avoid market timing issues is to invest regularly, “drip feeding” money in, rather than investing in one-off chunks.
When a fund or other asset falls in value, this regular contribution buys more units. Conversely, fewer units are bought when prices are higher.
This is known as “pound cost averaging”, and in theory reduces the amount your investments yo-yo up and down, while also boosting returns.
We have put this to the test over the past two decades, using figures compiled exclusively for Telegraph Money by data firm Morningstar.
We looked at the past 20 years, using investments into a FTSE 100 tracker fund, global tracker fund, and an emerging markets fund.
There was no emerging market tracker fund with a 20-year history, so an active fund that mirrored an emerging market index was used.
We also looked at a portfolio evenly split between the three funds and “rebalanced” once a year.
For each of these we looked at how investing a lump sum compared with a drip-feeding approach.
In one scenario £12,000 was invested in a lump sum on April 6, the beginning of the tax year, while in the other £1,000 was invested at the start of every month. The total investment over the period was £240,000.
What the figures show
Initially it looks like there is no benefit to drip feeding. After 20 years all scenarios have generated returns that are within a few percentage points of each other.
The FTSE 100 tracker grows to £436,000 for the monthly investor, and £440,000 for the annual investor, while the global tracker reaches £495,000 and £497,000 respectively.
The emerging markets fund returns the most, reaching £647,000 for the monthly investor and £642,000 for the annual investor. The split portfolio reaches £527,000 for the monthly investor, and £531,000 for the annual investor.
The annual progress of each investment can be seen in the chart below, apart from the global tracker fund due to the overlap with the FTSE 100.
Russ Mould, of fund shop AJ Bell, said: “It is surprising to me that the returns all finish close together. The annual contributions benefit from the stock market rally that began in 2009 following the financial crisis, as money is invested earlier, providing greater exposure to a rising market.”
However, there are still benefits of drip feeding. By spreading the contributions across 12 months the monthly investor has less money at risk at any one time, compared with the annual investor who has put everything into the market at the start of the year.
If the figures charted the daily totals, rather than annual, the monthly investments would also follow a smoother path.
For investors with a time horizon of less than 20 years, that is valuable.
Brian Dennehy, of Fund Expert, the fund shop, said that aside from the money generated, “investing monthly is a great idea because it creates discipline, which is arguably the biggest problem for investors”.
In our scenarios, the annual investor still sticks to a regular habit.
However, if a lump-sum investor picked the wrong years to invest larger amounts, they would suffer drastically worse performance than a monthly investor.
“One other consideration here is fees,” said Mr Mould. “How and what your broker charges could have a bearing on how much each strategy would cost to implement. For instance, 12 dealing fees a year instead of one could have an impact on returns.”
Overall, Mr Mould said that the data highlighted the benefits of patient, long-term investing, using the stock market as “a get-rich-slowly scheme rather than a fruit machine in search of an elusive jackpot”.
The split portfolio
In terms of how much they have at the end of each year, the monthly and annual investor follow very similar paths.
But the three-way split portfolio outperforms both the global tracker fund and FTSE 100 by a significant margin, due to a combination of the emerging market exposure and annual rebalancing.
The rebalancing dampens the worst of the emerging market falls, reallocating profits from this portion in good years and buying more in years where markets have fallen.