Few can read financial horo-scopes to predict the gyrations of the stock market. Instead of trying such an arcane art to invest lump sums, take the far safer route of regular saving.
By drip-feeding money, there is a good chance that the overall share or unit price will be purchased at a considerably lower price.
Quite apart from the financial discipline involved, investing regularly – such as on a monthly basis – can be undertaken out of earnings and other income.
A glance at the principal indices show how marked are the fluctuations even over just the last 12 months: FTSE 100 5768-7122, FTSE All-Share 3180-4031, S&P 500 1867-2134, Dax 8820-12,390 and Hang Seng 20,368-28,588.
Regular saving is a good way for beginners to gain the investment habit. Investing just £50 a month can result in accumulating thousands of pounds over the years. As a nation, Halifax research shows more is being saved on a monthly basis: £113.77 by comparison with £85.71 a decade ago.
Wherever possible, make the saving as tax-efficient as possible, such as through an Individual Savings Account (ISA), Junior ISA, pension or a friendly society tax-exempt savings plan. The current monthly limits are:
- £1,250 for ISA (£15,240pa)
- £340 for Junior ISA (£4,080pa)
- £233.33 for pension for child or unearned person (£2,800pa)
- £25 for tax-exempt savings plan (£300pa).
Children would be far better investing long-term in the stock market rather than taking the derisory deposit rates available. Personal pensions are often overlooked and yet they can be started for a baby whilst an adult not in work – perhaps a spouse or someone taking a career break – can still contribute.
For a net annual contribution of £2,800, the Government boosts the value to £3,600.
Darius McDermott, managing director of discount broker Chelsea Financial Services, warns that “monthly savings become less effective in terms of reducing volatility as time goes by and your pot of money builds up If you have been investing monthly for five years or so, you effectively have a lump sum you are simply adding to”.
Taking this into account, review holdings regularly – at least every six months – to ensure they are performing as expected and to check there are not better options.
One of the important aspects of monthly saving is to ensure the transactional costs are limited. For funds, apart from the necessary stamp duty, four other charges may arise: initial, annual, purchase and sale.
Many investment companies offer monthly savings schemes at nil expense to encourage regular investors, notably Fidelity, Investec and Standard Life Savings. Aberdeen and Baillie Gifford offer a free service apart from sale fees of £10 and £22 respectively.
RIT Capital Partners, effectively run by the Rothschild family, is a leading such trust which used to offer free monthly dealing but upon being moved to Hargreaves Lansdown, a monthly fee of 0.5 per cent (minimum £1.50) is charged. Investment trusts have several advantages over open-ended collectives like unit trusts. They can borrow when a good opportunity arises, known as ‘gearing’, and have boards of directors answerable to shareholders. Frequently, it is possible to buy shares at a discount to the underlying asset value.
One of the sectors which show how regular investing works more efficiently is emerging markets on account of the greater volatility. The turbulent Chinese sector this year could hardly have been predicted.
For fund choices, Tilney Bestinvest monitors with a close eye. Its ‘pedigree picks’ include Standard Life UK Equity Income Unconstrained, Unicorn UK Income, Henderson European Focus and Franklin UK Smaller Companies.
Further afield, it approves of Fidelity Emerging Markets, First State Asia Pacific Leaders and CF Odey Opus. When reviewing your portfolio, check with this broker as to collectives it places “in the doghouse”.
Building societies and a few banks encourage regular savers by offering slightly higher rates. Six per cent is available with three banks provided a current account is also held: Leeds-based First Direct (£25-£300), HSBC Advanced and Premier (£25-£250) and M&S Bank (£25-£250). Five per cent is paid by TSB (£25-£250) and four per cent with HSBC’s other current accounts (£25-£250).
Watch for accessibility and for penalties. Beverley, for example, cuts its 1.60 per cent on its Monthly Saver by one per cent if 12 payments are not received each year.
According to Moneyfacts, the top building society rates are a variable four per cent (Kent Reliance on £25-£500 and Nottingham on £1-£400) and a fixed 3.5 per cent (Saffron on £10-£200).
Regular cash ISAs are not well remunerated. Only six providers offer them of which the best not requiring a local address pay two per cent: Buckinghamshire, Nationwide and Newcastle with minimum monthly payments of £10, £50 and £1 respectively. Only nine contributions annually are required at Nationwide.
Children’s regular savings enjoy better rates. A splendid fixed six per cent is available with Halifax (£10-£100) for its Kid’s Regular Saver, followed by 3.5 per cent with Dudley (maximum £150 monthly) and Nationwide (£1-£100), both of which are variable. The first two are aimed at children under 16 years whilst Nationwide’s FlexOne is for 11-17 year-olds.
Many friendly societies offer a tax-exempt savings plan (TESP) which can be enjoyed quite separately from the ISA allowance. Monthly contributions are capped at £25 and any age can subscribe unless a society has a restriction.
Friendly societies are mutuals and TESPs roll-up tax-free apart from a small tax on dividend income which cannot be reclaimed. The minimum period is 10 years but many opt for longer, such as 18 or 21 years for children. Withdrawals are not allowed and early closure may mean receiving less than you invest.
Societies calculate a sum assured and hope to better that with regular bonuses. Sheffield Mutual, founded in 1892, currently quotes a sum assured of £4,902 for £25 monthly over 15 years. A high proportion (45 per cent) of its with-profits fund is invested in property or commercial mortgages. A TESP at £25 monthly which ran for 10 years with a £3,083 sum assured will pay out £3,883 this month.
In addition to great investment returns, some societies offer other benefits, such as discretionary grants towards dental and optical expenses.
With-profits endowment savings plans are also available on a regular basis from friendly societies. The bonuses are not guaranteed as they depend on investment fund performance.
For £50 monthly invested over a decade, Money Management awards top place to Sheffield Mutual which paid £7,752 (five per cent annual growth), followed by Healthy Investment with £7,582 (4.6 per cent) and Wakefield-based Kingston Unity with £7,434 (4.2 per cent).
Case study: Mutually beneficial
Railway signalman Karl Pitchfork, 47, from Doncaster was recommended to Sheffield Mutual Friendly Society by his financial adviser, Joe McKenna of Clear Finance, Doncaster.
Karl opened a tax-exempt savings plan with Sheffield Mutual four years ago at £25 a month. “It has shown amazing performance – far better than anywhere else,” he says.
As a result, his wife, Fiona, a veterinary nurse, and three-year-old son, Carter, now have plans and he intends to start them for his two older children, aged 18 and 21.
Karl also started a monthly Regular Saver plan on a monthly basis which matures when he is 60.