On 11 February the FTSE 100 Share Index opened at 5784. It closed the week on 15 February at 5787. At first glance it looks a nice gentle week with a modest rise of 3. In reality the index was as low as 5683 during the week, 100 points down, and as high as 5938, 150 points up. And this isn't a one-off, with investment markets yo-yoing up and down dramatically over the last year.
Timing investment transactions, especially where large single premiums are involved, becomes particularly crucial at times like these. When markets are volatile, to get the best possible deal - invest on a day when markets are low - you either have to be very lucky or very knowledgeable. And even if you are knowledgeable you can get it wrong sometimes.
An alternative option is to gradually phase investments, lessening the risk that people choose the wrong date to invest (the day when the market is very high). This happens as a matter of course when people have a regular savings contract. But for people who invest large single premiums, the risk is much higher that someone can invest at the top of the market.
The ability to spread the risk and buy some units when investments are low – known as pound cost averaging - has been around for as long as the markets have been in existence, so the strategy is hardly revolutionary. But generally it has required advisers to manage the administration of dealing with these multiple transactions.
But help is at hand. Some of the new breed of self-invested personal pensions (SIPPs) offer the ability to gradually drip feed a single contribution into the investment market. The single payment is paid in the same way as any other, with no additional work for the adviser. But if the client and adviser wish, some, or all of the money can initially be held in the SIPP bank account and gradually drip fed into their chosen investments over a pre-agreed period of time. Typically this can be over 3, 6, 9 or 12 months.
Pound cost averaging can take the worry out of investment decision-making. If the market falls, the client benefits by getting more units when the price is low. And it makes timing less critical as the investment is not as sensitive to market risk - by spreading the investment the price paid for shares is averaged out and the possibility of investing everything at the top of the market is avoided.
Pensions and savings vehicles are generally medium to long-term investments. But investing at the top of the market can still have a significant impact on the amount people receive at the end of the day. It is possible to be right about the future direction of a share price or market, but lose money because the timing of the transaction was off.
Pound cost averaging gives the potential to provide sustained growth over time, regardless of short-term fluctuations. And it can allow people to concentrate more on where to invest their money rather than wasting effort on trying to find the exact best time to invest. While markets continue to be very volatile it is worth considering the benefits of a simple, hassle-free way of spreading a client's risk by drip feeding their investments through a SIPP.
Tax and legislation are liable to change. This information is based on Standard Life's current understanding of law and HM Revenue & Customs practice.
Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.
Andrew Tully
Senior Pensions Policy Manager
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